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Author: 


Barnett,  Samuel 


■    m  mm  ■ 

Life  insurance  accounting 


Place: 


Louisville, 

Date: 

1909 


MASTER  NEGATIVE  i 


COLUMBIA  UNIVERSITY 

PRESERVATION  DIVISION 

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«»«><»^  OF  BUSINESS 


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i     "  ■'  If*'* 


*-  A 


LIFE  INSURANCE 
ACCOUNTING 


By 

SAMUEL  BARNETT 

CONSULTING  ACTUARY 

ATLANTA,  GEORGIA 


THE  INSURANCE  HELD 

UXnSVBXE.  KENTUCKY 


COPYRIGHT,  1909 

wr 

SAMUEL  BARIOTT. 


! 

Table  oi  Contents. 


Chapter    L  INTRODUCTION. 

(general  Idea  of  Accounting   S 

LegBl  Accounting   • 

Separate  Parts  of  AoeaaoXtm   < 

Plan  of  This  Work   T 

Cbapter  IL  LIFE  INSURANCE  BOOKKEEPING. 

General  Idea   8 

Peculiarities  of  Life  Insurance  Bookkeeping   S 

Ust  of  Books    11 

General  Journal   12 

Application  Register   1  ,   14 

Policy  Register   15 

IndiTldiial  Policy  Ledger  Cards  i   If 

Agent's  Policy  Memorandum  Ledger  ;   19 

Agent's  Note  Memorandum  Book   21 

The  Agent's  Journal  •   22 

The  Agency  System  in  General   22 

The  Pranium  Joonua   M 

.The  Inyestment  Journal'   If 

The  Expense  Journal   37 

The  Insurance  Terminated  Journal   '   41 

Hie  IMTldend  Joarma  »   4f 

The  Annuity  &  SupplND^ary  Contract  Joonal  .  «^   50 

The  General  Ledger  ^   50 

Bank  and  Cash  Account   51 

Agenf  ■  Pemcmal  Ledger   52 

Record  of  Classifled  Insurance   S2 

Beeerret  and  Dividend  Records   SS 

Mortality  and  Lapse  Records   56 

Completing  the  Records  and  Balancing  the  Books   57 

Chapter  m.  OONGLUSIONS  FROM  THE  FACTS. 

Legal  ReaervM   ft 

The  Contingency  Reserve    (2 

Proportional  to  Fluctuations   62 

The  Standard  of  Safety   63 

Oontlngraey  Reennra  Tabic   M 

Calculation  of  ContiagMicy  Reaorve   IS 

Maximum  Insurance  on  Sinf^e  Life   67 

Probable  Fluctuations    68 

Natnre  of  the  Contingency  Reserve    69 

How  Created,  Uaed  and  Bedistrlhvfted     tt 


« 


Gkupter  IV.   DIVIDEND  CALCULATIONS. 

Regulated  by  Law   ^ 

RMnttiiig  Tniats    " 

Elements  Entering  into  Dividend  Calcttlatioii*   '* 

The  Duty  of  Dividend  Calculations   "^^ 

Incidence  of  Expenses  and  Profits   ^ 

BxpeniM   • 

Prengdmn  CJollection   

General  Administration   ^ 

Taking  Care  of  the  Funds  

Interest   ^ 

MortaUty   •  •   J* 

Lapses  and  Surrender   

Medical  Selection,  I^apses  and  Surrenders   82 

Legal  Classifications    ^ 

Formulae  tor  Dividend  Galeatetiaas    8S 

AppHeatkms  of  the  Formulae   •'  

Tie  Aggregate  Divisible  Surplus  

Practical  Method  of  Dividend  Calculations   W 

Ctastor  STATSMENTS. 

-  go 

General  Explanations    "* 

Form  of  Statements  ■  , . .  • .  99 

How  to  Make  Out  StatemenU  •  •    

Oftin  and  Lees  BzMMt    •  

Chapter  VI.    EXAMINATIONS  AND  VALUATIONS. 

Their  Object  

Net  VahMtfoin  and  liegal  Bewnren   101 

Defects  of  Net  Valuation^   1*^1 

Effect  of  Rapid  Growth  .'.  •  •  

Natural  Accounting  and  Vahwtioiui  i  

CondflMed  Stntenent  tor  Porpoees  of.  YaMkm   105 

SoiTODcy  and  inatAreaej     10" 

Equalization  

Savings  ;  


Life  Insurance  Accounting 


CHAPTER  I. 


INTRODUCTION. 

The  ultimate  object  of  Accounting  k  to  determine  the  rights  of  th« 
various  jmrties  connected  with  the  business. . 

The  right  to  call  for  an  Accounting  is  vested  in  the  Stoekheilders  and 
Policyholders. 

The  duty  of  Accounting  rests  upon  the  Companies. 

And  yet  in  many  respects  correct  legal  Accounting  is  more  important 
to  the  Companies  than  to  the  Policyholders.  In  fact,  it  is  oft^  more 
important  to  perform  a  duty  than,  to  insist  upon  a  right. 

Strange  to  say,  the  subject  of  Life  Insurance  Accounting  has  been 
little  studied. 

The  rights  of  the  Policyholders  and  of  the  Stockholder^  are  vay  had^ 
defined  and,  in  fact,  scarcely  defined  at  all. 

And,  of  course,  conversely,  the  duties  of  the  Companies  are  very 
badly  defined  and,  in  fact,  scarcely  defined  at  all. 

As  a  consequence,  there  are  no  very  definite  rules  for  examining  the 
Companies  and  no  very-  definite  forms  for  Companies'  Statements.  How 
a  Company  is  to  account  is  left  pretty  much  to  the  Company. 

Still,  there  are  some  rigid  legal  requirements.  Requirements  which 
are  too  rigid  in  some  particulars  and  too  lax  in  others.  Requirements 
which  seem  unjustly  to  favor  some  Companies  and  to  bear  very  harshly 
on  other  C-ompanies. 

In  our  opinion  it  will  greatly  benefit  the  Companies,  particularly  the 
young  Companies,  more  closely  to  study  the  subject  of  Accounting  and 
to  devise  correct  and  fair  methods  of  examinations  and  complete  and  cor- 

s 


roct  forms  of  Company's  Statements,  and  more  thoroughly  to  understand 
tlie  i^tiye  rights  of  Stockholders  and  Policyholders. 

LEGAL  AGOOmiTIlie. 

All  rights  are  determined  by  Law.  The  Law  must,  therefore,  ovtliae 
the  general  method  of  Accounting. 

But  to  arrange  and  classify  the  facts  in  soeh  a  way  as  the  Law  niaj 
apply,  is  the  work  of  the  Actuary  and  of  the  expert  Insoraiiee  Book- 
keeper. 

Under  general  rules  of  Law  the  Actuary  must  make  calcnlatioiis  so 
as  to  ascertain  under  the  rules  of  Law  the  rights  of  the  parties  ia  doUars 
and  cents. 

By  Legal  Accounting  we  mean  such  Accounting  as  will  be  sanctionfid 
by  a  Court  of  Law  and  Equity,  anywhere.  We  do  not  mean  mere  «»- 
formity  to  some  local  statute. 

The  Accounting  must,  therefore,  be  legal  and  the  law  mnst  ghre 
general  direction  to  everything  that  is  done. 

THE  SEPARATE  PiJtTS  OF  ACCOUHTISG. 
first  Record  of  facts. 

The  facts  cannot  be  wdl  lecwded  without  first  being  properly  classi- 
fled,  caaasificatimi  mnst  be  nade  with  the  main  «Kl  in  view  ;to-wit:  the 

r^ts  of  the  paitieB  as  determined  by  legal  mles. 

The  expenses  must  be  dassifled,  before  recorded,  from  a  legal  stand- 
point with  r^eraace  to  who  ate  to  pay  the  expenses,  or  npon  whimi  the 
expenses  are  t»  fall  in  the  legal  method  of  Accounting. 

J%t  saTings  and  profits  must  be  dasrified,  before  recorded,  with  ref- 
i9Biee  to  the  legal  qncstSon  as  to  i^um  they  b^ong,  considering  the 
sources  whoice  thqr  emanated. 

It  is  clear,  therefoi^  Aat  the  record  of  and  prior  classifications  of 
the  facts  mnst  be  made  in  enbordination  to  the  main  end  la  wkm,  and 
this  constitvtes  the  first  step  in  Accounting. 

Lif^  Insurance  Accountkig  siKNild,  therefofe^  presmt  a  complete  ^s- 
tem  of  double  entry  bookkeeping,  arranged  in  the  best  way  for  determin- 
ing the  rights  of  the  parties  cqiUMeted  with  the  badness. 

Second.  Mathematical  deductions  from  the  facts. 

From  the  f^cts  j^op^ly  recorded,  must  be  calculated  the  I^gal  Be- 
sprre  which  the  Company  should  carry ;  the  Cont^jOMy  Bowrro  wsfuifed 

c 


by  the  standard  expressly  or  impliedly  set  up;  the  aggregate  amount  of 
profits  or  fBayings  to  be  paid  or  credited  to  the  Pc^cyholders  and  the  pro- 
portions in  which  these  sayings  are  to  be  distributed  to  the  separate 
classes  and  indiyidual  Policyholders  and  Stockholders. 

Valuations  have  for  their  object  to  determine  how  wdl  the  Ck>mpany 
is  carrying  out  the  contracts  and  what  are  the  dangers  of  insolvency 
and  what  are  the  probable  pn^ts  or  savings  that  the  Company  may  make 
in  the  future  and  what  its  future  is  likely  to  be. 

Third.  Conclusions  of  Law. 

After,  in  conformity  to  general  rules  of  law,  the  facts  have  been 
properly  classified  and  recorded  and  after,  under  these  rules  of  law,  the 
proper  mathematical  calculations  have  been  made  and  the  mathematical 
results  ascertained,  the  law  pronounces  final  judgment  and  determines 
the  rights  of  the  parties.  This  renders  the  Accounting  complete  and 
establishes  the  ends  aimed  at. 

FLAM  OP  IBIS  WORK. 

This  work,  therefore,  sets  out  first  a  complete  system  of  double  entry 
bookkeeping,  giving  all  the  forms  necessary  and  explaining  their  use. 

The  book  then  gives  a  complete  treatment  of  the  subject  of  the  Con- 
tingency Reserve  and  explains  its  object  and  the  nature  of  a  standard  of 
safety  and  how  to  determine  the  Contingency  Reserve  for  any  Company. 

The  book  then  takes  up  the  subject  of  Dividend  calculations  and 
shows  how  under  legal  rules  the  Company  ought  to  divide  out  profits 
to  the  Policyholders,  and  what  are  the  relative  rights  of  Policyholders 
and  Stockholders. 

The  Book  then  takes  up  the  subject  of  valuations  and  the  subject  of 
real  and  artificial  insolvency  and  the  correct  method  of  testing  the  prog- 
ress of  the  Company. 

As  a  part  of  the  general  subject  the  book  gives  a  complete  form  of 
Statement  arranged  with  reference  to  the  great  end  in  view;  to-wit:  to 
ascertain  the  rights  of  the  parties  connected  with  the  business.  The 
form  is  complete,  though  not  very  long,  and  gives  the  things  that  are 
needed  in  order  to  ascertain  the  rights  of  the  parties. 


7 


CHAPTER  n. 

LIFE  IKSOSAIKX  B00EKBSPIX6. 

A  correctly  arranged  double  entry  system  ol  life  InsuraiMie  htnA» 
constitutes  an  object  lesson  showing  the  practical  worldiig  of  the  Cfm- 
pany.  No  doubt  the  best  education  the  stodent  of  Lifte  Inamaee  can 
obtain  is  carefully  to  study  well  arranged  doable  entry  book  form  9mA 
to  follow  the  successive  entries  in  the  different  books. 

In  the  forms  here  given,  the  headings  are  so  arranged  as  to  snggest 
the  forms  of  entries  needed.  A  study  of  the  fcMrm  will  explain  how  to 
make  the  entry. 

The  forms  are  sufficient  for  the  most  complicated  and  largest  busiBess, 
and  yet  substantially  the  same  forms  are  needed  for  every  bustuess  no 
matter  how  small. 

Of  course  the  forms  may  be  slightly  varied.  In  certain  instances 
cards  may  be  preferred  rather  than  permanent  books,  but  no  matter 
w  hat  variations  are  made  the  main  divisions  if  the  records  are  complete 
must  remain  substantially  as  here  given. 

PECULIARITIES  OF  LIFE  INSURANCE  BOOKKEEPING. 

We  give  here  three  keys  which  virtually  unlock  the  whole  system  of 
Life  Insurance  Bookkeeping.   They  are  as  follows: 
First  The  contiBgeiit  nature  of  the  facts. 

When  a  Company  issues  a  p<^icy  of  Life  Insurance  the  Company 
beeomes  liable  In  effect  the  Company  has  issued  a  bills  payable,  but 
this  bills  pi^able  is  subject  to  future  unknown  contingencies.  In  the 
iadlYidnal  case  it  is  impossible  to  teU  how  these  contingencies  will  turn 
OBt  Tlie  party  may  live  70  yeaia.  He  may  die  tomorrow.  Ill  the  indi- 
vidaal  ease  the  Company  does  not  know  what  its  liability  is. 

Tils  coiitiiifeiit  nature  of  the  facts  is  the  controlling  peculiar^ 
of  Life  Imsaiaiice,  or  of  Insaiaiiee  in  genml. 

As  a  fwnlt  <rf  tlMw  unknown  future  contingencies  the  policy  as  a 
bills  fi^ble  cannot  now  be  entered  upon  the  hooka  proper  of  the  Com- 
pai^. 


Similarly,  the  premium  obligations  are  in  effect  assets  of  some  aort 
belonging  to  the  Company,  yet  these  assets  are  subject  to  contiiigraciea. 
The  Policyholder  is  to  pay  prminms  if  he  lives,  but  premiums  are  to 
cease  at  his  death. 

Thus  the  premium  obligaticms  due  to  tiie  Company  by  any  one 
Foli<*yhold^  are  unknown  quantities  and  cannot  be  eateired  for  their 
true  value  upon  the  boobi  in  the  individQal  ease  at  the  tune  tiiat  the 
policy  is  takai  out 

Thm  it  would  seem  that  to  a  great  extent  the  contingent  facts  of  a 
Life  Insurance  Ccmipany  are  k^t  off  of  record:  As  individual  facts  so 
they  are.  But  in  aggr^tes  tJiey  partially  appear  in  net  Legal  Reserve 
liabilities. 

From  this  contingent  nature  of  a  Life  Insurance  contract  two  im- 
portant results  follow: 

A.  The  Life  Insurance  facts  are  facts  in  aggregate,  or  ratios, 
or  averages. 

These  aggregate  facts  are  made  up  of  individual  facts  of  course,  but 
it  is  only  the  aggregate  or  ratios  or  averages  that  constitute  the  Insu- 
rance facts  propar  and  that  find  their  way  to  the  g^iml  Ledger  and  that 
ai^ear  in  the  general  Statem^t  of  the  Company. 

But  to  keep  the  run  of  the  aggregate  facts  we  must  at  the  same  time 
keep  the  run  of  the  individual  facts. 

We  have,  therefore,  iM  general  Ledger  and  the  individual  Ledgers. 

The  General  Ledger  covers  the  Insurance  facts  proper  or  aggre- 
gates, and  the  Individual  Ledgers  as  m^oranda  cover  the  individual 
facts  which  make  up,  but  are  not  in  themselves,  parts  of  the  insuranoe 
facts  proper. 

B.  Auxiliary  books.  As  another  incidoit  of  the  contingent  nature 
of  Life  Insurance  facts  and  as  incidaotal  to  the  fact  tiiat  we  cannot  mctt^ 
the  cfmtingent  ccmtracts  in  detail  in  full  upon  the  books  proper,  we  must 
keep  manoranda  of  the  contingent  facts  on  Auxiliary  books. 

These  Auxiliary  books  are  in  the  nature  of  m^oranda  or  facts  pre> 
paratory  to  the  facts  that  are  to  go  into  the  Insurance  records  proper. 

The  application  for  instance  is  not  a  contract,  but  is  merely  a  pro- 
posal for  a  contract 

The  Poliqr  Bister  when  the  poli^r  is  first  issued  does  not  repre- 
sent a  contract  actually  formed;,  but  merely  a  inenorandum  of  a  policy 


which  may  or  may  not  be  delivered  and  thvm  Buiy  or  may  not  go  into 
force.   And  so  with  other  Auxiliary  books. 
Second.   The  system  of  Special  Journals. 

The  facts  in  Insurance  fall  into  a  few  distinctly  marked  classes 
such  as  the  receipt  of  premiums,  the  receipt  of  interest,  the  payment  of 
expenses,  the  payments  to  Policyholders,  etc. 

These  classes  are  so  well  marked  and  the  typical  entry  in  each 
is  so  well  marked  that  it  is  convenient  to  keep  each  in  a  separate  Journal. 

It  will  be  noted  too  that  the  receipts  of  premiums  and  of  interest 
and  the  payment  of  expenses  and  the  payments  to  Policyholders  are 
definite  facts,  certain,  free  from  contingencies,  and  such  as  may  be  en- 
tered at  once  upon  the  books  and  cannot  like  contingent  transactions  be 
kept  off  the  books. 

In  Life  Insurance  P>ookkeeping,  we  therefore,  keep  the  Special 
JiNumals  hereafter  named. 

Third.    The  Agency  System. 

The  Agency  system  is  an  integral  and  exceedingly  important  part  of 
Life  Insurance.    In  fact,  it  is  the  life  of  the  whole  business. 

Yet  the  Agency  system  is  simply  a  means  to  an  end.  The  Agency 
books  as  a  rule  are  auxiliarj-  and  not  part  of  the  books  proper. 

Yet  the  Agency  system  is  so  important  that  it  needs  to  be  separately 
provided  for. 

If  the  above  distinctions  are  constantly  borne  in  mind  it  is  easy  to 
»ee  the  identity  between  Life  Insurance  Rookkeeping  and  other  forms  of 
bookkeeping,  and  the  tgrstem  becomes  veiy  eaagr. 

« 

LIST  OF  BOOKS. 

• 

We  gire  here  a  genml  oiitlme  of  tke  books  needed  in  a  c<Mnplete 
i^fitan  of  Life  Insiiraiice  Bookkeei^^p. 

Tiie  books  fall  into  tliree  main  clasBes: 

First.  The  Inaiiraiice  books  proper.  These  e(»taia  all  teehnical 
bocrfckeeping  entriea  pn^er. 

Beeoiid.  Auxiliaiy  hooka.  These  rdate  ehlelty  to  preliminaiy  facts 
aad  cQUateral  frcts  which  mi^^  grow  isto  regular  book  <mtries  or  which 
inqulain  regular  book  oitries,  but  are  not  tSmutshtM  yet  teehnkally  book 
entries.  * 

10 


Third.  CkmTeniencesw  These  relate  to  re-clas8iftcation«  and  dediic- 
tioms  made  from  entries  pnnper  asd  are  coiiTeni^ices  med  lit  the  Ac- 
coifnting. 

INSmUKCS  BOOKS  PROPKR. 

(1)    The  General  Journal. 
J  (2)    The  Premium  Journal. 
I  (3)    The  Investment  Journal. 

(4)  The  Expense  Journal. 

(5)  The  Insurance  Terminated  Journal. 

(6)  The  Dividend  Journal. 

(7)  Annuity  and  Sui^l^nentaiy  Ck>ntraet  Books. 


Income. 


Disbursements. . 


Machinery , 


(8)  Agent's  Journal. 

(9)  The  General  Ledger. 


AUXIUART  BOOKa 

(1)  Application  Register. 

(2)  Policy  Register. 

(3)  Individual  Policy  Ledger  Cards. 

(4)  Cash  and  Bank  Memorandum  Book.  % 

(5)  Individual  Stock  Book. 

(6)  Agency  Ledger. 

(  7)  Personal  Ledger. 


(1 

(2 
(3 
(4 
(5 

(6 
(T 
(8 
(9 


OmnnBHIBllCBS. 

Classified  Insurance  Written  Books. 

Reserve  and  Dividend  Calculation  Books. 

Actual  to  Expected  Mortality  Calculation  Books. 

Agent's  Policy  Memorandum  Ledger. 

Agent's  Note  Account. 

Bills  Receivable  Memorandum  Book. 

Bills  Payable  Memorandum  Book. 

Investment  Diary  and  Interest  and  Rent  Book. 

Alphabetical  indexes  of  Declined  and  Reduced  Risks. 


11 


No  confiision  need  arlae  firaiii  fceepiag  several  Journals  any  more 
tlian  making  differoit  Joomal  entries  cn  different  pafee  of  tlie  same 
Jonmal. 

If  a  Journal  entry  is  made  on  the  wrong  Jonmal  no  harm  is 
done  exc^t  that  it  is  inconyeni^t.  The  entry  will  find  its  way  to  the 
I.«dger  all  the  same. 

Looee-Leaf  books  will  he  found  most  conyaurat  for  Insnranee 
records. 

We  will  take  up  in  detail  each  of  the  foregoing  books  in  the  simplest 
osier  for  practical  explanation  and  use. 

THE  GEHERAL  JOURH AL. 

On  the  General  Journal  should  be  entered  all  the  facts  at  the  be- 
ginning of  the  business  and  all  the  closing  entries  at  the  end  of  the 
jear,  or  at  the  end  of  the  business,  and  if  desired,  the  monthly  aggregates 
of  all  entries  on  the  Special  Journals. 

On  the  General  Journal  will  also  be  entered  all  the  facts  that  do 
not  properly  fall  in  any  of  the  Special  Journals. 

The  ruling  of  the  General  Journal  will  be  the  same  as  the  ordinary 
tloumal  in  any  other  business;  thus: 


OBHXBAL  JOOTOTAL. 


Doaerfpttona 

« 

Debits. 

Credits. 

* 

Otherwise  the-  following  form  of  Ckmeral  Jonmal.  is  sometimes  prc- 
f tarred : 

OENEBAL  JOUKNAL. 


Debits. 

Descrlptkms. 

Credits. 

* 

1 

12 


This  is  a  partial  adoption  for  the  Ctoneral  Journal  of  what  is  known 
as  the  Columnar  method,  which  we  will  extaisivdy  use. 

The  numbo*  of  columns  maj  be  increased  as  much  as  we  please,  ac- 
cording to  the  extent  we  widi  to  dassify,  as  Gash,  Bank,  ^Agent's  Bal- 
ances, Personal  AecountSy  etc.,  etc,  to  be  written  at  the  head  of  the 
Columns. 

The  op^ng  entry,  indicating  the  beginning  of  bumness,  will  be 
made  upm  iht  Q^eral  JoumaL  ^le  Assefts  of  the  C<mipany  will  be 
ddiiited  to  1^  Liabilities.  l%e  goieral  fonn  of  the  openii^  entiy  oa 
the  General  Journal  will  be  as  fcdlows: 

Real  Estate. 

Seal  Estate  Mortgages. 

Bonds. 

Stocks. 

Collateral  Loans. 
Bills  Beemrmble. 
Personal  Accounts. 
Cash. 

Othor  Assets.  Br. 
To  Bills  PayaUe. 
Personal  Accounts. 
Othar  Liabrnties. 
Capital  Stm^ 
Stock  Surplus. 
Cimtingency  Beserve. 
At  the  end  of  each  year  when  the  books  are  balanced  the  accounts 
that  are  to  be  balanced  into  profit  and  loss  fidiould  be  so  bulaaeed  and 
hit  upon  l^e  old  books  and  into  the  opening  entry  of  the  new  year 
diould  be  brou^t  nothing  but  the  assets  and  liabilities  as  per  the  gen- 
eral form  aboye  giTOi. 

The  Contingency  Besmre,  it  will  be  noted,  is  not  a  liability  in  its 
proper  seises,  but  must  a^ear  among  the  liabilities  on  the  right  side  of 
the  Ledger. 

After  the  Company  has  commenced  business  there  will  appear, 
among  the  Assets,  Policy  Loans,  Policy  Liens,  Premium  Notes,  and 
Agent's  Balances,  etc.,  and  among  the  Liabilities,  Policy  Reserves  and 
present  value  of  other  contracts,  etc.,  but  these  will  not  appear  in  the 


IS 


cipe&ing  jBntiy  before  business  is  begun. .  Th^  may  appear  in  the  ramlts 
inoiiglit  forward  at  the  beginning  of  any  subsequent  year. 

In  proetice  it  will  be  convenient  to  sab-divide  tbe  foreiEoing  classee 
into  smaller  claases. 

We  may  tihow  the  different  sorts  of  Real  Estate  Mortgages,  the  dif- 
fereiit  classes  of  Bonds  and  Stocks,  the  different  sorts  of  Bills  Beceiy- 
iibie  and  we  should  name  tbe  individiial  Stockholders  and  the  differ^t 
mutU  of  Sniplus^  if  any. 

These  snb-classifications  should  appear  on  the  General  Jonmal  and 
each  sab-class  shoald  have  its  separate  Ledger  Account. 

The  entries  in  the  General  Joomal  will  be  posted  to  the  General 
Insurance  Ledger  in  exactly  the  same  way  as  in  any  other  business. 

On  the  General  Joomaly  as  said  above,  will  be  entered  not  only  the 
opening  entry  at  the  thne  of  organization  and  the  closing  entries,  but 
irill  he  made  also  those  entries  in  the  ccmdnct  %ii  the  business  that  do  not 
bdkmg  to  any  of  the  Spedid  Journals. 

We  maj  also^  if  desired,  transcribe  to  the  General  Journal  each 
numth  the  footings  on  all  the  Special  Journals,  thus  accumulating  in  the 
General  Joomal  the  aggregate  footings  of  all  the  business  done  by  the 
CVmpa^y.  If  we  do  Ala  all  postinyi  to  the  Goiml  Ledgor  will  be  ttmik 
tie  General  JoomaL 

If,  however,  we  do  not  cany  the  footings  from  the  Special  Journals 
to  the  General  Journal  we  will  post  Uie  footings  dlieetly  fnmi  the 
Special  Journiala  to  the  General  Ledger. 

We  will  postpone  the  explanation  of  the  closing  oitries  until  we 
have  comOdeied  the  Special  Journals  and  developed  the  general  qrstem. 

After  the  opening  oitry  upon  the  General  Journal  has  been  made 
the  Oompany  Is  ready  for  business  and  to  lee^ve  Applicatkms  for  In- 
surance. We  wM  moA,  tkMton,  consider  the  Application  Bsglster. 

THE  APPLICATION  REGISTER. 

We  give  here  a  convenient  form  for  the  Application  Register.  It 

should  contain  all  the  material  points  in  the  Application. 

It  will  be  noted  that  the  Application  Roister  is  merely  Auxiliary. 
It  does  not  express  any  contract  as  yet  made  and  is  not  a  part  of 
the  records  proper.   It  is  merely  a  memorandum  of  business  proposed. 


As  soon  as  an  application  is  received  it  should  be  entered  on  the 
Application  Kegister  and  sent  to  the  Medical  Department. 

The  Application  Register  should  be  inspected  frequently  so  as  to 
keep  track  of.  the  applications  and  to  prevent  delays  in  prompt  action 
thereon. 

All  Rejected  Applications  and  all  Applications  that  have  been  al- 
tered or  reduced  by  the  Company  to  less  favorable  forms  or  amounts  on 
account  of  the  undesirability  of  the  Risk  should  be  indexed  either  by 
the  Card  system  or  by  the  usual  indexes. 


AggLICATOaf  KMUSIJUL. 


AppU- 

Insured. 

Fpueir. 

Bene- 
ficiary. 

Agency. 

Local 
Pliyrtclan. 

Medical 

Remarks. 

Number. 

Date.  1 

< 

Name. 

Residence. 

Occupation. 

Other  Insurance. 

Kind. 

Amount. 

Premiums. 

Dividends. 

Other  agreement. 

Name. 

Relation. 

Name. 

Address. 

Settlement. 

Name. 

Address. 

Report. 

Folio. 

Fee. 

Date  sent. 

Date  returned. 

Report. 

Folio. 

Fee. 

Date. 

Number. 

1 

THE  POLICY  REGISTER. 

.Ag^jgop  as  the  Application  is  approved  by  the  G<»npany  the  PoU(*y 
s|HflHp^ttai  and  at  once  ^tered  on  iMe  Policy  Register. 

lUPPIke  here  a  convenient  form  to^  the  Policy  Register. 

1%e  Policy  Register  is  an  Auxiliary  Book.  It  is  a  manoraBdum 
Book  and  not  a  book  of  original  entry.  The  Policy*  as  a  rule  does  not  go 
into  eftect  wlien  it  is  registered,  but  only  when  the  Pvmlum  is  paid  and 
the  Policy  delivered. 

The  Polii^  R^^ster  should  be  indexed  ali^abetlcally  1^  cards  or 
1^  the  ordinaiy  indexes. 

All  the  materliU  parts  <tf  the  Policy  should  be  c<^ied  upon  the 
Policy  Register. 


The  Policy  should  tken  be  sent  to  the  Agent  to  deliyer  the  Policy 
and  collect  the  Premium. 

Tlie  Insurance  Facts  proper  are  the  aggregate  facts,  but  all  along 
tlie  line  we  need  to  note  the  two  ooUatend  stzesmv—the  Individaal 
Policyholder  and  the  Agent. 

From  the  Policy  Begister,  therefore^  we  must  transcribe  eoUat^ally 
to  these  two  side  streams. 

We  first  call  attrition,  therefore,  to  the  Indiyidual  Policy  Ledger 
Card  and  afterwards  will  explain  the  Agency  System. 

We  will  speak  of  'Tosting^  from  the  Journals  to  the  General  Ledger 
to  indicate  entries  made  in  the  Oeaml  Ledger  trcm  the  Cteneral  er  any 
of  the  Special  Journals. 

But  we  will  speak  of  'Transcribing^  to  the  collateral  side  streams 
and  not  'Costing." 


POLICY  SEOISTEB. 


Policy. 

AppU- 

J      Description  of  Policy. 

Insured. 

Bene- 
ficiary. 

<  Agent. 

Phy- 
sicians. 

Terminated. 

Remarks. 

Number. 

Date. 

Number. 

s 

Age. 

Kind. 

Amount. 

Premium. 

How  Payable. 

Dividends. 

c 

E 

« 

< 

Jl 
*•» 

0 

Name. 

Address. 

Occupation. 

Name. 

Relation. 

Name. 

Address. 

When  Sent. 

Delivery. 

Local. 

Med.  Directors. 

Date. 

How. 

Cause  of  Death. 

H 

H 

H 

1  t 

THE  jmnpnmiAL  poLicnr  isdger  gabd. 

We  give  here  a  convenient  form  for  the  Individual  Policy  Ledger 
Card.  This  is  an  Auxiliary  Ledger  Account,  or  memorandum. 

This  Card  should  be  written  up  as  soon  as  the  Policy  is  entered 
upon  the  Policy  Kegister.  There  should  be  filled  in  the  date,  the  form, 
the  kind  of  Policy,  the  age,  the  amount,  the  Office  Premium  for  annual, 
semi-annual  and  quarterly  payments,  the  Pure  and  the  Loading  for  the 
First  year  and  Renewals,  the  name  and  address  of  the  insured,  and 


the  beneficiary  and  the  relationship,  the  Agent  and  the  Commission  con- 
tract. These  facts  should  be  transcribed  on  the  Card  directly  from  the 
Policy  Register. 

The  Policy  Ledger  Cards  may  be  kept  in  numerical  order. 

If  preferred,  however,  they  may  be  kept  by  localities,  or  by 
Agencies. 

Before  the  Premium  is  paid  and  the  Policy  delivered,  that  is  to  say, 
before  the  Policy  is  in  force,  the  Individual  Policy  Ledger  Card  does 
not  represent  any  contract  and  does  not  represent  technically  aigr  Book 
entiy. 

Before  the  Policy  goes  into  effect  the  cards  may  be  kept,  if  de- 
sired, in  a  Provisional  cabinet,  but  should  be  removed  to  the  Existing 
cabinet  as  soon  as  the  Premium  is  paid  and  the  Policy  delivered. 

Or  the  card  may  be  filed  as  soon  as  written,  in  the  Rxisting  cabinet. 
By  Existing  Policies  we  mean  Policies  in  force. 

When  a  Policy  Terminates  the  card  should  be  put  in  a  Terminated 
Card  cabinet  for  the  year,  to  be  used  in  classifying  terminations  for  the 
year.  At  the  end  of  the  year  the  card  should  be  placed  in  a  permanent 
Terminated  card  cabinet 

Whenever  a  Premium  or  Dividend  is  paid,  or  whenever  there  is  a 
change  of  beneficiary,  or  an  assignment  or  a  loan,  or  whenever  the 
Insurance  is  Terminated,  or  whenever  any  change  whatever  takes  place 
in  the  status  of  the  Policy  the  Individual  Policy  Ledger  Card  should  be 
at  once  procured  and  the  data  furnished  upon  the  card  should  be  used  to 
make  the  entry  on  the  books  and  the  entry  thus  made  on  the  books 
snould  in  turn  be  transcribed  at  once  to  the  PoUcy  Card  befoie  it  la  re- 
placed in  its  cabinet. 


17 


Terminated,  When, 
How,  Cause  Death, 
Settlement,  Kevlvals, 
Memoranda. 

• 

• 

Reinsurance  1 

PREMIUM  PAYMENTS. 

Amount. 

1 

1    1    1    1    1    1    1    1    i    i    1    1    1  1 

l_L-j 

1 

1    1    1    1    1    1  , 

I  1 

HM 

1    1    1    1    1    1  1 

1  1 

1 

1 

1 

1    1    1    1    1  1 

1  1 

1 

1 

1  1 

1 

1 

1 

1 

1  1 

1 

1 

Date. 

i 

RENE  WAL. 

Load. 

f  1 

1  1 

Yr. 

IN 

to 

« 

00 

A 

s 

e* 

eo 

r- 

s 

s 

i  i 

1  ! 

Amount. 

1 

i 

!  1 

HH 

hH 

1 

HH 

1  1 

1 

1  i 

1  t  1 

1 

Pure. 

1 

1  1  1 

i  1  1 

1 

1 

1  1 

1 

1 

Date. 

1 
1 

Yr. 

S 

«D 

S 

_ 

1 

_l 

Amount. 

I 

i  

1 

~n~n 

NEW. 

Load. 

1 

hH-H 

1     ;     '     !  1 

1 

1  1 

1  1 

fill 

1  ! 

1  1 

1  1 

1  1  1 

i  ! 

1 

1 

1 

j 

1  1  I 

Date. 

i 

1 

Pure.  ^ 

Yr. 

1 

1 

1 

ee 

•-< 

1  , 

Amount. 

1     1  1 

— 1 

1  1 

i 

1  ! 

1 

._ 

— r 

1  1 

1 

1 

1 

1 

i 

1  1 

1 

1 

1 

1  1 

1 

1  1 

1 

S 

OS 

a 

Office 
Premiuii 

— 

Yr. 

« 

s 

1 

Amount. 

1  1 

1 

1 

H 

hr 

1 

1 

1  1 

1   1   1  1 

1 

1    1  1 

1  1 

Dates 
Due. 

1 

1 

1  1  1  1  1 

1  1 

1  1 

1    1  1 

1  1 

1  1  1 

t 

1 

1    1  I 

i  1 

Date. 

A. 

S.A. 

cr 

Yr. 

e« 

1 

ce 

1' 

1 1 1 

DIVTOENM  AMD  HOW  PAID. 


ADDITIONS  OR 
DEDUCTIONS. 


It. 

Date. 

Amount 
Declared. 

How 
Paid. 

Amount 

Accumu- 
lation, i 

Date. 

Amount. 

Date. 

Descrip- 
tion. 

Amount 

Date. 

DcKTip- 

i 

n 

Dr. 


POUCT  ACJOOVIIT. 


ft. 


All  premiums  paid  should  be  transcribed  for  their  full  amount  on  the 
face  of  the  card.  All  Dividends,  Liens,  Notes,  Loans  and  all  payments 
on  account  of  the  same  should  be  transcribed  on  the  back  of  the  card. 

It  will  be  noted  that  all  the  Insurance  facts  proper  that  appear  on 
the  Policy  Ledger  card  appear  also  in  the  General  Ledger  in  aggregates. 

The  Policy  Ledger  Card  is  thus  a  mere  copy  or  memorandum  or 
transcription,  bringing  together  in  one  place  all  the  facts  relating  to  this 
Policy.  The  Policy  Ledger  Card  is  not  part  of  the  Insurance  books 
proper.  It  relates  to  one  of  the  side  streams  only.  It  represents  in  part 
some  of  the  itemized  particulars  tlie  aggrcigates  of  which  constitute  the 
Insurance  Facts  proper. 

If  entries  of  one  transaction  have  to  be  made  upon  more  than  one 
book  the  Individual  Policy  Ledger  Card  should  be  carried  from  book  to 
book  so  as  to  furnish  the  facts  to  be  entered,  thus  saviiig  the  inooii* 
venience  of  having  to  copy  from  one  book  to  another. 

In  the  case  of  a  short  term  or  of  increasing  or  diminishing  premiums 
memoranda  may  be  made  on  the  back  of  the  card  or  under  Memoranda 
on  the  front  of  the  card,  or  perhaps  still  better,  the  raling  <rf  the  card 
varied  to  meet  the  peculiarities  of  the  case.  But  the  poadUe  vaxietfea  an 
too  great  for  us  here  to  go  into  further  detail. 

The  Policy  Ledger  Card  thus  represents  in  part  one  of  the  collateral 
streams  connected  with  the  Aggr^ate  Insmaaee  Facta.  Tha  nHitf  eoi- 
lateral  stream  is  the  Agency  system. 

therefore,  take  up  aaxi  ^  Afency  System^ 

AGENT'S  POLICY  MKMORANDUM  LfiPGER. 

On  the  Poliqr  Begistar  the  Policies  are  altered  in  anmaMI  oite. 
(Indexed  by  Number.) 

On  the  Individual  Poliqr  Ledger  Cards  the  P<^ciea  an  re-arraafsd  - 
according  to  tiie  Policyholdm.   (Indexed  by  Poli<*yho]dm.) 


19 


On  tlie  Ai^eiit's  Polky  Memorandum  Ledger  the  Policies  are  re-ar> 
nnged  accofdii^  to  Agents.    (Indexed  by  Agents.) 

We  give  here  the  form  of  the  Agent's  Policy  Memorandum  Ledger. 

We  transcribe  from  the  Poli<*y  Begkter  directly  to  the  Agait'a  P<^ 
icy  MaDoraBdnm  Ijedger. 

Tlie  Policj  MeoMxraiidnm  Ledger  is  a  mere  Mesmorandiim.  It  doea 
aot  before  tiie  Premium  is  coUected  represent  a  charge  against  Hie 
Agent,  bat  r^resoits  merely  that  the  Policy  has  been  sent  to  the  Agent 
for  the  Agent  to  collect  the  Preminm  and  deliver  the  Poli<7  and  lemik 
the  Premium  to  the  Cktmpany  when  the  Preminm  is  cc^lected. 

The  Agent  owes  nothing  nnti!  the  Preminm  is  collected.  The  case 
is  exactly  analogons  to  Hie  Gdm^any^s  soidfaig  a  note  to  the  Bank  to  be 
eoHeeted,  with  the  inirtnictioiis  to  send  the  prooeeds  as  soon  as  eoQeeted 
hack  to  the  Company.  The  Bank  owes  solftiBg  until  the  note  ii  eok- 
leetedL 

If  the  Agent  collects  the  Premiioi  and  fails  to  reiait  it  tiie  AgessA 
will  owe  the  Preminm  to  the  Ckimpany,  bat  not  nntO  then. 

Whoi  the  Preminm  is  paid  by  the  Policyholder  to  the  Agent  and 
the  Policy  deliyered,  the  contract  goes  into  effect  The  Company  then 
becomes  bound  as  between  the  Company  and  the  Pcdicyholdery  and  the 
Preminm  must  be  at  cmee  altered  cm  the  Preminm  Journal  whether  the 
Agent  remits  to  the  Company  or  not  If  he  fails  to  ronit  he  must  be 
charged  the  amount 

AGENT'S  POLICY  MEMORANDUM  LEDGER. 


Vmmm  of  Am^t- 


DcBcriptloiui. 

Debits. 

Premhuns. 

Date. 

Number. 

Kind. 

Insured. 

Amount  Policy. 

Date. 

e 

o 

c. 

u 

IK 
& 

Q 

Sundries. 

Short. 

C 
a 

3 

« 

Interest. 

Totals. 

♦J 

De.scription.s. 

Sundries. 

Dividends. 

Commissions. 

c 
1-1 

Cash. 

Notes. 

Not  taken. 

Total. 



i 

1 

1 

1 

20 


From  the  Premium  Journal  we  transcribe  directly  to  the  Agaifs 
Policy  Memorandum  Ledger. 

The  debit  side  of  the  Agent's  Policy  Memorandum  Ledger  (Trans- 
cribed from  the  Policy  Register),  thus  shows  the  sending  the  Poliqr 
to  the  Agent  for  him  to  deliver  the  Policy  and  collect  the  Premium,  and 
the  credit  side^  (transcribed  from  the  Pronium  Journal)  shows  the  set- 
tlement. 

From  the  Agent's  Policy  Memorandum  Ledgar  we  find  the  Policies 
in  the  Agoit's  hands  unreported  on. 


THE  AGENT'S  NOTE  MEMORANDUM  BOOK: 

The  Agent  is  eonsidared  by  the  Ccmipany  as  in  effect  an  oidorser 
<m  all  notes  sent  in  by  him. 

If  this  is  the  agreem^t  between  tiie  Company  and  the  Agent  the 
Agent  will  be  liable  lor  the  amount  even  though  strictly  he  cannot  ba 
sued  upon  the  note,  unless  he  actually  endorses  it 

The  mdoTtner  is  liable  if  a  note  is  not  paid  when  due. 

Thus,  the  Agent  is  c(mting»itty  liable  on  all  the  notes  he  sends  in 
to  the  Company. 

The  Company  should,  therefore,  keep  for  its  own  protection  a 
classified  list  of  the  notes  by  Agencies. 

This  is  the  object  of  the  Agent's  Note  Memorandum  Book. 

AmaVB  HOTS  XBMOBANDUM  BOOK. 


Moras  CM  WHKM  AeSMT  HI  OOSTFIKClEliTLT  UMMLE. 


6 
*i 

>* 

>^ 

te. 

•4-* 

c 

o 

o 

e 

o 

c 

H 
o 

%* 

o 

Due. 

t  Pol 

o 

z 

intio 

nt. 

1 

e 
Z 
%-i 

Iptlo; 

nt. 

« 

o 

o 

O 

O 

O 

o 

u 

3 
O 

Dat 

el 

■4-< 

CC 

6 

d 

K 
V 

6 

c 

6 

« 

E 

Q 

Q 

Z 

Z 

p 

< 

Z 

Z 

a 

-< 

1  iim^miiiffii 

■llHlB' 



PATHBNT  ON  MOVBS. 


n 


Whenever  a  note  is  received  bj  tlie  Company  from  tlte  Afoit  it  Is 
transcribed  on  the  debit  side  of  the  Agent's  Note  Aeconnt,  indiesthig  a 
possible  liability  on  the  part  of  the  Agent  in  respect  to  the  note. 

When  the  note  is  paid,  or  when  there  is  a  partial  payment  the  iMt 
should  be  transcribed  on  the  credit  side  of  the  Agent's  Hote  Mtanoran- 
dum  Book. 

When  two  sides  balance  the  Agent's  Note  Account  is  clear. 

The  Agent's  Note  Memorandum  Book  is  a  mere  m^orandnm.  It  is 
merely  a  re-arrangement  of  the  list  of  Bills  Beceiyable  (Pxeminni  Notes) 
by  Agencies. 

THE  AGENT'S  JOUSHAL. 

If  the  Company  deals  extensively  through  its  Agents,  particnlarly 
if  it  keeps  a  running  account  with  its  Agents,  it  will  be  advisable  to  keep 

a  special  Agent's  Journal. 

We  give  here  the  form  of  such  a  Journal. 
This  Journal  is  a  book  of  original  entry. 

The  Agent's  Balances  only,  as  shown  at  the  foot  of  the  columns, 
will  be  carried  forward  to  the  General  Ledger,  as  these  aggregate  results 
are  all  that  belong  to  Insurance  Books  proper. 

But  collaterally  we  will  transcribe  to  the  Agent's  Individual  Ledger. 


DSBITS. 

CBEDFTS. 

Date. 

Descriptions. 

Agent. 

Casli. 

l^anli. 

Interest. 

Bills  Uecelvable. 

Sundries, 

Descriptions. 

Agent. 

Cash. 

Bank. 

Interest. 

Bills  Receivable. 

Sundries. 

II 

1 

1— 

The  Agent's  Individual  Ledger  thus  gives  itemized  particulars  of 
vhich  the  Agent's  balance  in  the  General  Ledger  is  the  aggregate. 


82 


ASSaSTS  INDIVIDUAL  LEDGER. 


An  Agent's  Ledger  of  the  mnial  f<»ni  may  be  he^  showing  the  indi- 
vidual aecoants,  which  aceonnts  represent  the  itendied  partievlan  that 
appear  as  goMral  Agenf  s  Balances  on  tiie  Gawral  Ledger. 

THE  A6BKCT  SYSTEM  IN  ^NBRAL. 

The  Company  thus  deals  with  the  Agent  in  three  distinct  ca- 
pacities: as  a  Banker  to  collect  the  Premiums,  as  a  quasi  endorser  on 
the  Notes  sent  in  by  the  Agent,  and  personally  in  his  individual  capacity. 

First.  The  Agent's  Policy  Memorandum  Ledger.  This  shows  the 
dealing  with  the  Agent  in  the  light  of  a  Banker  to  collect  the  Premiams 
for  the  Company  and  to  remit  to  the  Company. 

The  debit  side  of  the 'Agent's  Policy  Memorandum  Ledger  (trans- 
cribed from  the  Policy  Register),  shows  the  number  and  descriptions  of 
the  Policies  sent  to  the  Agent  to  collect  the  Premiums.  The  credit  side, 
rtranscribed  from  tlie  Premium  Journal),  shows  the  settlements.  The 
Account  thus  shows  also  what  is  unsettled  for  by  the  Agent. 

This  is  thus  an  Account  with  the  Agent  as  the  collecting  Banker 
of  the  Company. 

Second.  The  Agent's  Note  Memorandum  Book.  This  Book  deals 
with  the  Agent  as  the  quasi  endorser  of  the  premium  notes  sent  in  to  tlie 
Company  by  the  Agent  and  upon  which  the  Agent  may  become  actually 
liable  to  the  Company.  It  is  thus  the  Agent's  Contingent  Liability  Note 
Account. 

Third.  The  Agent's  Personal  Account.  This  Account  deals  with 
the  Agent  as  an  actual  ddl>tor  or  creditor.  The  actual  adTances  to  the 
Agent  and  all  actual  moneys  paid  to  the  Cknapany  on  the  Asaifs  Ac- 
count will  come  in  the  Agent's  Personal  Account. 

The  Agent's  Policy  Memorandum  Ledger  matures  into  an  actual 
Personal  Account  as  soon  as  4he  Agent  collects  the*  Premium  and  fiiils 
to  remit. 

The  Agent's  Note  Memorandum  account  matures  into  an  actual  per- 
sonal account  as  soon  as  the  note  matures  and  is  unpaid. 

Suppose  we  wish  to  know  the  standing  of  an  Agent  at  any  time: 
We  first  examine  his  Personal  Account  to  see  what  are  his  actual 
debits  <MP  credits  or  what  is  his  actual  balance  at  the  ^es»t  time.  * 

is 


We  next  bis  Pol^  Aeeonnt  to  see  how  many  Policies  he 

has  on  hand  nnselilled. 

We  next  examine  his  Note  Account  to  see  how  mnch  he  msy  pos- 
sib^  hecome  liable  to  the  CksnpaBj  upon  as  endofser,  that  is  to  say, 
what  is  his  cimtingent  Note  Liabilily  Account  and  what  is  the  prob- 
abilily  of  the  ctmtingencies  becoming  actnalities.  From  these  three  ae- 
fonnts  together  the  Agent's  standii^^  Is  to  be  measured. 

From  these  three  Aceoonts  taken  U^se^bsap  the  Cknnpaqy  moat  make 
1^  its  mind  how  to  deal  with  the  Agent. 

If  the  Policies  are  all  settled  f oar  and  the  Notes  are  all  paid  there  is 
Bothing  1^  to  consider  b«t  the  Agoit's  individnal  perscmal  account 

But  if  there  are  a  good  many  Poiides  unsettled  for  and  a  good  many 
notes  unpaid  the  Company  may  hemtate  about  making  furth^  adTaaees 
to  the  Agont  on  his  PeiaMial  Account  , 

All  this  is  a  matter  ot  judgmeai  for  the  Ckxmpany  from  the  titree 
Accounts  taken  together. 

OTHER  AGENCY  SYSTEMS. 

Some  Gompanies  will  not  accept  notes  at  all,  particularly  notes  for 
first  premiums.  If  an  Agent  sends  in  a  note  the  Company  may,  as  an 
accommodation  or  for  the  protection  of  the  Company,  hold  the  note  and 
collect  it  as  the  property  of  the  Agent.  Such  notes  will  not  go  into  the 
BiUs  BecdTable  of  the  Company,  but  will  simply  represwit  notes  held 
by  the  Company  to  be  collected  for  the  Agent's  Account. 

In  all  such  systems  the  Ag^t  will  be  credited  with  the  collection 
wkm  made.  1*he  entries  are  too  simple  to  require  farther  explanation. 

m  mmoM  joornm.. 

The  two  great  sources  of  income  in  a  Life  Insurance  Company  are 
the  premiums  and  interest,  ( including  rents). 

The  Premium  Journal  is  of  special  importance  because  an  entry  up- 
on the  Premium  Journal  means  in  general  that  the  policy  goes  into  force 
by  virtue  of  the  facts  represented  by  this  entry.  The  Premium  Journal 
shows  the  "Paid  for  Business  put  upon  the  Books."  It  is  a  book  of 
original  entry. 

We  giTe  here  the  form  of  the  Premium  Journal. 

u 


As'soon  as  the  Ag/sat  has  a  setUement  witii  the  Policyholder  and 
collects  tJie  pronium  and  di^yean  the  policy,  the  policy  goes  into  effieet 
and  the  contract  is  closed  apd  in  justice  to  the  Policylicdder  and  to  re- 
cord the  liaMities  against  the  Company  th^se  facts  must  be  shown  at 
once  hy  an  emtry  upon  the  Premium  Journal,  whether  the  Agent  has  re- 
mitted to  the  Company  or  mot 

1i  the  Agoit  does  not  remit  that'  is  a  matter  between  the 
and  the  Agent,  with  wMfk  the  Policyhold^  has  noliiing  to  da. 
Agent  does  not  remit  the  Company  must  charge  the  Agent  and 
the  i«emium  as  paid. 

Moreover,  tiie  premium  oitry  must  be  complete  in  every  respect 
It  must  be  in  regular  double  mtiy  form,  stating  all  the  ddbits  and  all 
the  credits  and  tiiese  must  balance  each  other  in  each  entry. 

The  first  tldng  to  do  is  to  get  the  Policy  Ledger  card. 

From  the  facts  upon  the  card  the  description,  that  is  to  say,  the  de- 
aoriptire  ctdumns  in  the  Premium  Journal,  must  be  filled  out  id^tifying 
and  describing  the  policy. 

We  must  th^  mBike  the  Journal  entry  proper. 

We  must  fill  the  appropriate  columns  on  the  debit  side. 

If  theie  is  a  di^id^  the  amount  must  be  inserted  in  the  dlyidend 
column. 


2S 


PAID  OUT  OP 
DUE  DATE. 

Due 
Last 
Yew. 

•pwi 

•pBoi 

DEFERRED.  ^ 

TUI 
Next 
Year. 

•pBoi 

— 

— 

From 
Last 
Year. 

■Mod 

1  1 
j  CREDITS. 

i 

9 

s 

» 

Renewal. 

New. 

'una 

'saijpung 

•suondijDsaQ 

DEBITS. 

•ssoq  puB  JUOJd: 

Commis- 

•Man 

-spoapfAia 

•pr«d  »»»a 

DESCRIPTIONS. 

Premiums. 

Policy 

')unouiy 

•pom 

-jactaniff 

*p9jnsui 

If  there  are  any  commisBkms  thcgr  iniisl  l>e  at  once  eatmi  wkMm 
tbe  Agent  lias  ranitted  tbe  money  or  not,  and  no  matter  how  the  aie- 
connt  stands  hetwem  the  Company  and  the  Afent.  The  commimkm 
liability,  whether  certain  or  contingent,  attaches  at  once  agaimaithe  Com- 
pany and  mnst  be  at  <aice  entmd.  If  the  Commission  liaUlity  to  eo«- 
tingent  this  will  be  shown  in  tiie  Ag^t's  Personal  Account  or  his  Note 
Accoont 

The  cadi  received  mnst  be  pnt  in  the  Cash  colvmn  on  th«  iMt  ■!§& 
If  tihere  are  any  Liefts  or  Kotes  given  in  paynmt  of  the  PvanloM 

they  mnst  be  inserted  in  l&e  Lien  or  Note  columns  on  the  debit  sid& 
If  the  Agoit  fsakB  to  remit  in  fall,  the  baianee  due  by  him  mosI  bt 

iasorted  in  the  Agent's  column  on  the  d^it  side  and  the  Agent's  name 

writtoi  in  the  column  headed  Descriptions.  That  is,  the  Agrait  must  be 

charjeed. 

On  the  credit  side  we  must  enter  the  Premium  in  the  Hew  or  Be* 
newal  columns,  as  tiie  case  may  be,  separating  into  Pure  and  Load  m ' 
toidicated  in  the  form. 

If  any  interest  is  paid  it  must  go  in  the  Interest  column. 

If  the  Ag^t  overpayls,  enter  to  his  credit  in  Agent's  Credit  column. 

Further  to  the  right  will  be  found  the  State  recdved  from,  which  Is 
to  be  filled  in,  and  stiU  further  to  the  right  columns  indicating  De- 
ferred Premiums  and  Premiums  paid  otherwise  than  when  due. 

These  columns  sufficiently  explain  themselves.  They  are  used  to 
ascertain  exactly  the  Premiums  belonging  to  the  calendar  year  in  ques- 
tion, or  to  any  given  period. 

Entries  upon  the  Premium  Journal  will  thus  be  the  same  as  in  any 
other  regular  Double  Entry  Bookkeeeping,  except  that  we  simply  enter 
each  numerical  item  in  its  appropriate  column,  instead  of  having  to 
write  out  the  description. 

The  aggregate  footings  at  the  bottom  of  the  pages  will  indicate  the 
aggregate  facts  which  constitute  the  Insurance  facts  proper. 

These  aggregate  results  are  all  that  will  be  posted  to  the  General 
Ledger. 

But  here,  as  in  all  cases,  we  need  to  take  note  of  the  two  collateral 
streams:  the  individual  Policyholders  and  the  Agency  System. 

Prom  the  entry  in  the  Premium  Journal  we  transcribe  collaterally, 
to  the  Individual  Policy  Ledger  Card,  the  full  Premium  on  the  front  of 


IT 


the  card  and  the  Dividend  on  the  back  of  the  card.  Also,  if  a  note  or  lien 
is  given  we  transcribe  the  note  or  the  lien  in  the  General  Policy  Account 
on  the  back  of  the  Individual  Poli<:;y  Ledger  Card,  as  a  meiiMKnuidiiBi 
iigainst  the  Policyholder. 

It  is  noted  that  all  these  individual  entries  on  the  Policy  Ledger 
Cards  are  simply  memoranda.  They  are  the  itemized  particulan  of 
which  the  aggregates  go  to  the  General  Ledger. 

The  Individual  Policy  Ledger  Carii  is  nerer  expected  to  balance. 

The  Premiums  paid  by  the  Policyholder  are  not  expected  to  bakmee 
the  death  losses  or  other  claims  paid  under  the  individual  policy. 

When  the  notes  or  liens  are  paid  memoranda  should  be  transcribed 
upon  the  credit  aide  of  the  PoUqt  Aeeouat  on  the  indiyidiial  Policy 
Xiedger  Card. 

Similarly  from  the  Premium  Journal  we  transcribe  the  settlement 
to  the  Agent's  Policy  Memorandum  Ledger,  as  an  ofiFset  to  the  Premium 
■charge  for  collection  already  entered  against  the  Ag^t' there 

It  will  be  no'ted  that  the  word  Premium  as  here  uaed.  means  Prem- 
ium Obligation  Receivable  for  it  is  the  Premium  Obligation  Becdrable 
that  is  parted  with  by  the  Comptmy  and  that  is  discharged  fey  tlie  PoU^- 
hold^* 

We  call  attention  to  the  colnranB  **FfAiey  Tear^  and  Ttaetkna^ 
in  the  Premium  Journal.  ' 

In  the  column  "Year"  we  most  insert  the  Policy  year. 

In  the  columns  "FraetkMuT  we  must  inert  Oie  ftaetional  Piemium 
that  is  now  being  paid. 

If  it  is  the  second  Policy  Year  we  put  2  in  ^  column  "Year."  If 
the  payment  is  annual  we  pnt  1  in  the  column  headed  <<Fiactioiui,'*  in- 
dicating a  full  annual  Proninm  and  not  a  fraetioiial  part. 

If  the  Prelum  is  payable  semi-aiiiiiially  and  the  first  H^ni-annual 
payment  is  now  being  made  we  pnt  ^  in  the  column  headed  <<FraetiiMis^ 
indicating  that  the  first  half  is  now  being  paid. 

If  the  second  semi-annnal  TpajmeaA  is  now  being  made  we  pot  V2  in 
the  CQinmn  headed  Fractioas,  indieftthiig  the  seeond  Mni-anMai 
payment  is  now  being  made. 

If  it  is  the  fifa  Policy  year  and  if  the  tidfd  quarterly  Freminm  is 
BOW  bdng  paid,  5  goes  in  the  colnmii  headed  ^OTear^  and  %  i<  the 
colamB  headed  <<Fnicti<ni&" 


28 


In  transcribing  the  payments  to  the  Individual  Policy  Ledger  Cards 
we  transoribe  on  the  card  at  the  end  of  the  period  to  which  the  Piemimi 

pays. 

Thus,  if  it  is  the  seventh  year  and  first  qnarter  we  post  in  the  asraith 
year  and  in  the  first  of  the  four  spaces. 

If  it  is  the  third  year  and  the  third  quarter  we  post  in  the  third 
year  and  in  the  third  of  the  four  spaces. 

If  it  is  the  first  year  and  an  annual  payment  we  post  in  iMe 
first  year  and  in  the  4th  space,  indicating  that  the  Premium  is  paid  to 
the  end  of  that  period. 

Always  pat  the  payment  in  that  sub-division  to  the  md  of  whieh 
the  payment  covers. 

We  will  now  give  some  illpitratlons  of  actual  Preminm  entrieB. 

Suppose  the  first  annual  MMHHs  ^00,  Gmnmisslon  ffiO,  and 
suppose  the  Agent  s^ds  |50 

We  first  get  the  Policy  Card  i^3^H|  to  the  Premium  Journal. 

The  descriptiim  must  be  filled  ih  uie  Descriptive  columns  of  the 
Pmnium  Journal,  giving  the  date,  name  of  the  Agent,  name  of  the  In- 
sured, Number  of  the  Poli<»y,  the  kind  and  the  amount  and  the  Polky 
year,  and  the  factional  payment  and  the  amount  of  the  Premium  and 
the  date  due. 

The  regular  Journal  entry  will  be  as  follows: 


|50  Commissions, 

50  Cash.  Dr. 
To  |75  Pure  first  Premium 

25  Load. 


The  foregoing  is  ihe  complete  Double  entry. 

We  need  only  to  insert  each  itm  in  its  appropriate  place  in  the 
Premium  Journal. 

Collaterally  we  will  transcribe  to  the  Individual  Policy  Ledger 
Card  the  payment  of  the  flOO  Premium. 

Collaterally  also  we  will  transcribe  to  the  Agent's  Policy  Memo- 
randum Ledger  the  settlement  for  the  Premium  collection,  to-wit:  |50 
Commission,  and  $50  Cash. 

Only  the  aggregate  footings  in  the  Premium  Journal  at  the  end  of 
(he  month  will  go  forward  to  the  General  Ledger. 

2d 


An^in,  snppofle  tlie  Wimt  Premiimi  to  be  flOO  and  CkmunissioiM  $50, 
mid  suppose  the  Agent  ftdls  to  lemit,  Imt  nqooits  that  the  Company 
charge  to  his  Account: 

Afl^  filling  in  the  descriptioiui  in  the  Premium  Jonmal  as  bef<ne, 
the  cntrj  wiU  be: 

|60  OommissiGn. 
80  Agent  Dr. 

To  |75  Ffarst  Preminm  Pore. 

25  Load. 

Gdllaterallj  we  tmnseribe  to  the  Policjhcdders  Individnal  P<di<7 
ledger  Card  the  flOO  Preminm  payment  exactly  as  before. 

CoUatmlfy  also  we  tnoseribe  to  tke  Agents  Policy  Memorandnm 
ledger,  ISO  Commission,  and  fBO  diarge  to  the  Agent 

This  160  charge  to  the  Agmt  is  an  ''Agent's  Balance*' 'appearing 
in  the  Premiiim  Journal  aid  wfll  be  indvded  in  the  aggregate  footin^i 
at  the  ^  of  ^  numtii,  which  find  their  way  to  tiie  General  Ledger. 

We  mnst  also  transcribe  this  same  |50  as  a  memorandum  to  the 
Agent's  Indiridnal  Ledgiar.  The  acconnte  npon  the  Indiyidnal  Agent's 
I^sdger  thus  ctmstitnte  the  itemised  particolars  of  the  General  Agent's 
Balances  appearing  on  the  General  Ledger. 

Again,  sappose  tiie  Ibat  Premium  is  flOO,  and  Commission  $50,  but 
suppose  the  Agoit  accepts  a  note  of  flOO  from  the  Policyholder  and 
sends  the  whole  note  to  the  Company  for  the  Company  to  collect  the 
note  (the  note  to  become  the  property  of  the  Company),  and  account  to 
the  Agmt  for  his  Commissioiis : 

The  mtpy  will  be: 

f  50  Commissions. 
100  Premium  Note.  Dr. 

To  f  75  First  Premium  Pure. 

25  Load. 
50  Agent. 
As  said  above,  always  charge  Commissions  when  the  settlement  is 
made  with  the  Policyholder  by  the  Agent,  no  matter  what  may  be  the 
nature  of  the  settlement  between  the  Company  and  the  Agent.  The 
liability  for  Commissions  (certain  or  contingent)  attaches  to  the  Com- 
pany and  must  be  shown  of  record  at  once.  If  contingent  this  will  be 
shown  on  the  Agent's  Personal  or  Note  Account 


to 


We  thns  enter  Commissions  at  once  on  the  Debit  side  as  soon  as  the 
Poli<7  goes  into  effect 

CollateraUy  we  transcribe  to  the  Indiyidnal  Poli<7  Le^^  Caida 
the  settlon^t  of  tiie  Pr^nm,  f  100  for  the  exact  amount  of  the  Prem- 
ium, but  fm  the  back  of  the  card  we  also  transcribe  that  the  Poli<*yholder 
has  giT^  a  note  of  |100.  This  is  put  on  the  debit  side  of  the  General 
Poli<7  Account  on  the  Ledger  Card.  Whoi  this  note  is  paid  the  pay- 
m«it  will  be  transcribed  on  the  credit  side  of  the  G^eral  Policy  Ac- 
coont  on  the  Ledger  Card.  The  premium  credit  then  becomes  absolute 

Collaterally  also  we  transcribe  the  settlement  as  a  memorandum  to 
the  Agent's  Policy  Memorandnm  Ledger. 

But  there  renaim  to  post  the  Note  of  flOO  to  the  Agent's  Note  Ac- 
count as  a  menorandum  on  which  the  Agent  may  become  liable  if  the 
Policyholder  fails  to  pay,  that  is  to  say,  on  which  the  Agent  is  con- 
tingently liable  This  will  show  the  contingent  nature  of  the  Commis- 
si<ms. 

When  the  note  is  paid  the  fact  will  be  transcribed  on  the  Agent's 
Note  Account  and  this  will  render  the  Agent's  credit  of  |50  absolute. 

Again,  suppose  flOO  First  Premium,  Commissions  |50,  a  lien  taken 
1^  the  Company  for  |25,  and  cash  remitted  by  the  Agent  |25. 

The  entry  will  be: 

$50  Commissions. 
25  Liens. 
25  Cash.  Dr. 

To  $75  First  Premium  Pure.  ^ 

25  Load. 
Collaterally  we  transcribe  to  the  Individual  Policy  Ledger  Card  the 
full  settlement  of  the  Premium,  |100  for  the  exact  amount  of  the 
Premium,  and  on  the  back  of  the  card  we  transcribe  the  lien,  |25.  We 
liere  use  the  word  Lien  to  cover  such  liens  as  are  included  in  a  general 
contract  where  there  is  no  one  note  specially  given  to  represent  the  debt 
Collaterally  also  we  transcribe  to  the  Agent's  Polic^y  MemarandiUi 
Ledger  as  before. 

Again,  suppose  |100  Premium,  Commissions  $50,  Lien  |25,  this 
lien  being  allowed  under  some  general  contract,  and  suppose  the  PoUcj- 
holder  gives  a  note  of  |75  for  the  full  |100  less  the  U^,  and  mppmm  tht 


Agent  remits  tiie  f7li  note  to  tlie  Company  to  beeome  tlie  prop^r^  of 
tlie  Company;  the  oitry  will  be: 


ISO  GommiflBiims. 

25  Lien. 

75  Preminm  Kote.  J>t, 
To  |75  First  Preminm  Pure. 

25  Load. 
50  AgeaaL 


CoUateraUy  we  will  transcribe  to  the  Individnal  Policy  Ledger  Card 
the  full  settlenient  of  the  flOO  Preminm.  On  the  back  of  the  card  we 
win  transcribe  the  lien  oi  f25,  and  the  Preminm  Kote  of  f75. 

Collaterally  also  we  will  transcribe  the  settlonent  to  the  Ag^t's 
Polity  Memorandnm  Ledgi». 

We  will  also  transcribe  the  note  of  $75  to  the  Agent's  Note  Account 
as  a  memorandnm.  When  the  Agent's  Note  Account  shows  that  the  |75 
note  is  paid  the  Agent's  C<Mnmissioii,  $50,  will  be  absolate. 

Again,  wh«i  the  Agent  takes  the  Application  suppose  the  Policy- 
holder gives  his  note  for  flOO  the  first  Premium,  and  takes  from  the 
Agioit  a  receipt  showing  that  the  Policy  shall  go  into  effect  as  soon  as 
the  application  is  approved,  the  note  to  become  the  property  of  the 
Company. 

In  this  case  we  cannot  credit  the  Premium  at  once  because  as  yet 
the  application  has  not  been  acted  upon  and  there  cannot  be  a  Premium 
payment  as  such  before  the  application  has  been  approved. 

We  will  debit  this  note  to  Suspense  Account  on  the  Premium  Jour- 
nal and  hold  the  matter  in  abeyance  until  the  application  is  approved.  ' 
As  soon  as  it  is  approved  we  will  charge  Suspense  Account  to  the 
Premium,  thus  balancing  the  Suspense  Account  and  making  the  entry 
complete. 

The  two  entries  on  the  Premium  Journal  will  be  as  follows: 


$100  Premium  Note,  Dr. 

To  $100  Suspense  (Sundries  column). 
When  the  application  is  approved  the  entry  will  be  as  follows: 

$  50  Commissions. 

100  Suspense  (Sundries  column),  Dr. 

To  $75  First  Premium,  Pure. 

25  Load. 

50  Agent. 

32  • 


Suspense  on  the  credit  side  of  the  first  entry  balances  Snspeue  m 
the  debit  side  of  the  second  entiy,  and  thns  the  entire  tranaaHiim  ii 

shown. 

The  collateral  transcribing  to  the  Individual  P<dic7  Ledg^  CiM 
and  to  the  Agent's  Policy  Memorandnm  Ledger  will  be  the  same  as 
before.   The  note  of  $100  will  be  transcribed  to  the  Agenf  s  Note  AiP- 
count,  and  when  the  note  is  paid  his  credit  of  $50  will  be  effective. 
If  the  application  should  be  declined,  l^e  ^tiy  wonld  be: 

♦100  Snspoise.  Dr. 

To  $100  Premium  Note^ 

simply  reversing  the  first  of  the  above  entries. 

Again^  at  the  time  that  the  application  is  taken  suppo^  the  Ag^t 
collects  the  whole  of  the  first  Preminm,  $100  cash,  and  gives  a  receipt  to 
show  that  the  Policy  shall  go  into  dfect  as  socm  as  the  application  is  ap- 
proved; deducts  $50  as  his  commissions,  and  s^ds  $50  cash  to  the  Com- 
pany. 

The  aitry  will  be: 

150  Gash.  Dr. 

To  $50  Suspoise. 
As  soon  as  the  application  is  approved  the  entry  wiU  be: 
f^O  Commissions. 
50  Suspense.  Dr. 

To  $75  Pure  First  Premium. 

25  Load. 
The  collateral  posting  will  be  as  usual,  but  there  wiU  remain  neither 
debit  nor  credit  to  the  Agent. 

If  the  application  should  be  declined  the  entry  would  be: 

Suspense  Account.  Dr. 
To  $50  Bank, 
if  a  check  is  sent  to  the  applicant,  or  the  Agent  for  the  applicant. 

Again,  suppose  a  Renewal  Premium  of  $100,  with  Commissions  flO, 
Dividend  |15,  Lien  $25  and  Cash  $50: 
The  entry  would  be: 

^1^  Commissions. 

15  Dividend. 

25  Lien. 

50  Cash.  Dr. 
To  $75  Pure  Renewal  Premium. 

25  Load. 

88 


The  collateral  transcribing  to  the  Individual  Policy  Ledger  Card 
and  to  the  Agent's  Policy  Memorandum  Ledger,  if  collected  tlirough  the . 
Agent,  will  be  as  usual. 

Again,  suppose  a  Surrender  Value  of  $100,  and  suppose  the  whole 
of  that  Surrender  Value  is  used  to  purchase  Paid-up  Insurance: 

An  entry  should  be  made  upon  the  Premium  Journal  for  the  Sur- 
render Value  is  used  as  a  Premium.  The  entry  should  be; 

flOO  Surrender  Values.  Dr. 

To  $100  Pure  New  Premium. 

The  transcribing  to  the  Individual  Card  would  be  as  usual. 

The  foregoing  are  taken  simply  as  usual  types.  The  principle  is  iden- 
tical in  all  of  them.  We  make  the  entries  as  if  we  were  keeping  ordinary 
Double  Entiy  books^  and  insert  each  numerical  item  in  its  appropriate 
column. 

To  cover  cases  in  which  the  premium  payment  may  be  mixed  up 
with  other  accounts  in  one  settlement,  columns  headed  "Sundries"  are 
provided  on  both  the  debit  and  credit  sides,  so  that  no  matter  how  the 
premium  payment  may  be  mixed  up  with  other  transactions,  all  the 
transactions  can  be  entered  as  one  transaction  on  the  Premium  JouraaL 
If  necessary  we  may  use  several  lines  for  the  purpose. 

On  the  Premium  Jounial  we  f^uld  give  Mparate  pages  or  diviaioiis 
to  the  following: 

First  year's  premiums  original  insuranee. 

First  year's  premiums  original  annuities. 

First  year's  premiums  changed  generally. 

First  year's  proniums  dividend  additions. 

First  year's  j^remiums  paid-up  insurance. 

First  year's  joemiums  extended  insuraiiee. 

First  year's  premiums  sopplementaiy  e<mtx«et8 — ^life. 

Renewal  premiums  insurance. 

Bimewal  picmiums — annuities. 

Be-insurance  slioold  also  be  on  a  separate  page  in  tlie  Presraliiai 
Journal,  the  debit  and  credit  aides  swappii^  places. 

Revived  Insurance  may  also  be  k^t  on  a  separate  page  or  division. 
Witii  regard  to  the  Simdriea  eoivniBS  in  all  the  Journals,  it  is  evident 
that  the  partieulan  must  be  pealed  to  tiie  Qesieral  Ledg^,  as  ttae  can 

« 

S4 


be  no  real  account  on  the  Ledger  with  Sundries.  But  there  need  be 
few  entries  in  the  Sundry  columns. 

THE  mVESTMEHT  JOURS AL. 

The  Premium  Journal  and  the  Investment  Journal  constitute  the 
two  great  sources  of  Income  We  have  considered  the  Premium  Journal. 
We  take  up  next  the  Inves<anait  Journal,  of  which  we  here  give  the 
form.  This  is  a  book  of  O^ginal  £ntiy. 

In  aU  the  forms  we  leave  columns  headed  Sundries,  to  cover  entries 
not  especiaUy  provided  for  in  the  other  columns. 

Such  Pmcmal  Accounts  as  we  desire  to  go  in  aggregate  to  the  Gen- 
eral Insurance  Ledger  wiU  be  entered  in  the  Personal  Account  column. 

CkOlaterally  we  will  transcribe  to  the  Personal  Ledger  itemized  par- 
ticulars of  these  aggregate  Personal  Accounts. 

Likewise  with  the  other  Accounts  which  mav  appear  in  the  Invest- 
m^t  Journal,  such  as  Policy  liens,  Policy  loans,  Premium  Notes,  etc. 
With  regard  to  each  of  these  collaterally  we  will  transcribe  individual 
m«norandum  at  the  appropriate  places  in  the  collateral  Auxiliary  Books. 

We  may  introduce  if  we  wish  in  tho  Investment  Journal  additional 
columns  on  both  the  debit  and  credit  side  for  Real  Estate,  Real  Estate 
Mortgage  Loans,  Stocks,  Bonds,  and  other  classes  of  Assets. 

As  the  entries  involving  large  amounts,  such  as  Stock  and  Bond 
deals  and  Real  Estate  deals,  occur  infrequentlv  it  is  generally  preferable 
to  enter  these  amounts  in  the  Sundries  column,  giving  the  descripUon  in 
the  Description  columns. 

^     The  Investment  Journal  is  designed  for  regular  Double  Entry  Book- 
keeping, each  entry  to  be  made  in  its  appropriate  column. 

Thus,  if  $50  cash  is  paid  in  discharge  of  a  Policy  lien,  the  entiy  will 

^50  Cash.  Br. 

To  $50  Policv  Lien, 

the  cash  being  entered  on  the  debit  side  and  the  Policy  lien  cm  the  credit 
sifie. 

?  ^^''^^      payment  on  Real  Estate,  we  enter 

the  Real  Estate  under  Descriptions  on  the  debit  side  and  in  the  Sundries 
^S^sidt^^^  ^'^d  «^  tl^e  credit  side  in  the  Bank  column  on  the 

S5 


DESBTTS. 

CRBDIT8. 

Date. 

Descriptions. 

Sundries. 

Personal  Acct. 

Cash. 

Bank. 

Bills  Receivable. 

Bills  Payable. 

Policy  Liens. 

Policy  Loans. 

Premium 
Notes. 

Interest. 

Profit  and.  Loss. 

Descriptions. 

Sundries. 

Personal  Acct. 

Cash. 

Bank. 

Bills  Receivable. 

Bills  Payable. 

Policy  Liens. 

c 

> 
o 

c 

■i 

Premium 
Notes. 

Interest. 

Rents. 

Profit  and  Loss. 

First. 

Renewals. 

2 

Renewal. 

1 

It  is  not  neeeamy  furtiiar  to  iUnstrate  tbeme  simple  entries.  Any- 
one ovdinarity  familbff  witii  DoaUe  Entry  Bo(d±eeping  will  ind  no 
difltenlty  in  tills  branch  of  tlie  subject. 

Tbe  postings  to  the  O^ieral  Ledg^  will  be  the  numthly  footings  of 
the  different  cohmms. 

The  Sundries  colnnin,  of  coarse^  mnst  be  separately  posted  to  the 
Cteneral  Ledger. 

This  posting  of  the  aggregates  to  the  Gteneral  Ledger^  coupled  with 
the  collateral  transcribing  as  memoranda  to  the  individual  accounts  in 
the  Auxiliary  Bo(^  completes  the  entries. 

We  need  to  be  careful  not  to  omit  any  of  the  collateral  transcribing. 

But  even  if  we  were  to  omit  the  collateral  transcribing,  our  main 
boohs  would  still  balance  and  be  correct. 

We  might  be  put  to  a  good  deal  of  inconvenience,  however,  in  mak- 
ing  out  the  Individual  Accounts. 

Suppose,  for  illustration,  a  First  Premium  note  is  paid,  on  which 
the  Agent  is  considered  liable. 

We  need  to  enter  Cash  to  Premium  notes  in  the  Investment  Journal. 

We  need  to  transcribe  the  payment  of  the  note  on  the  Individual 
Policy  Ledger  Card. 

We  need  to  transcribe  the  payment  on  the  Agent's  Note  Account. 

We  need  to  cancel  the  note  on  the  Bills  Beceivable  Book. 


To  omit  any  one  of  these  may  cause  annoyance  and  delay  in  making 
out  personal  accounts  in  the  future  and  yet  there  would  be  no  mistakes 
in  the  aggregate  Insurance  Books  proper. 

All  mortgages,  collateral  loans,  bonds,  stocks,  policy  loans,  premium 
notes,  bills  receivable,  etc.,  will,  of  course,  be  entered  in  order  of  date 
recdved  in  the  Journals. 

In  order  to  keep  the  run  of  the  due  dates  and  an  alphabetical  list, 
abstracts  of  each  note  or  other  evidences  of  debt  should  be  made  on  loose- 
leaf  sheets  about  5x8,  one  original  and  one  carbon  copy  being  made  of 
each,  or  if  preferred,  one  original  and  two  carbon  copies.  The  abstracts 
should  show  all  particulars  needed.   It  is  not  necessary  to  give  the  form. 

Hiese  copy  abstracts  may  be  filed,  one  set  according  to  due  date, 
one  set  alphabetically  and  if  a  third  set  is  desired,  this  third  set  may 
be  filed  according  to  the  date  of  the  papers.  The  latter,  however,  is 
suiBciently  covered  by  the  Journal  entry. 

These  loose-leaf  abstracts  in  the  above  orders  should  be  kept  in 
loose-leaf  books. 

The  securities  themselves  may  most  conveniently  be  k^t  filed  ac- 
cording to  due  date. 

In  addition  to  the  above  eacli  hmg-time  security  such  as  a  mort- 
gage note  or  long-time  loan  should  have  a  separate  special  Ledger  ac- 
count upon  which  separate  columns  should  be  provided  for  interest  pay- 
ments and  the  payments  on  principal,  for  fire  insurance  and  for  leats 
and  repairs,  etc. 

As  these  forms  have  nothing  peculiar  to  do  with  insurance  we  refer 
the  reader  to  Keal  Estate  Mortgage  Loans  Companies,  Beal  Estate  Com- 
panies and  Banks  for  the  best  forms.  The  forms  are  simple  and  the 
reader's  ingenuity  may  easily  suggest  suitable  forms  for  the  purpose. 

These  may  be  considered  diflferent  forms  of  the  Bills  Beceivable  and 
BiUs  Payable  Books. 

THE  EXPENSE  JOURNAL. 

We  com^  now,  to  the  subfect  of  disbursm^ts. 
The  chi^  diiAmrsements  Ml  into  two  great  classes,  expenses  and 
piQrmentB  to  PoliigrhoMen. 

The  object  of  aU  Aeconnting,  and  therefore  the  object  of  all  classifi- 
cations  for  tiie  purposes  of  record,  is  to  ascertain  the  rights  of  the  par- 

S7 


ties  interested  in  the  basiiiesB.  The  clasdileatioiis  of  expenses,  therefoxe, 
should  be  guided  by  the  question,  whom  tiie  expenses  are  to  fall  on. 

Without  going  into  detail,  it  is  plain  that  cinunisslons  ought  to  fall 
on  the  premium  in  reqpect  to  which  the  eommissioiis  are  charged  and 
thus  on  the  'Po^eyhoHkit  who  has  to  pay  the  premium. 

Expenses  of  Premium  Collection  in  general, which  relate^  so  far  as 
we  know,  not  to  any  indiyidual  premium,  but  to  all  premiums  alike^' 
diould  be  charged  against  all  premiums  as  a  percentage  and  thus  fall  on 
the  premium-paying  Policyhtddors  as  a  class.  After  the  premiums  are 
completely  paid,  the  Poli^holder  should  be  charged  nothing  further  for 
the  expenses  of  Premium  collection. 

Expenses  which  relate  to  the  Company  as  a  whole  and  which,  so 
far  as  we  know,  do  not  relate  to  any  indiyidual  thing  or  Policyholder 
or  class  rather  than  to  any  other,  may  appropriately  be  called  Expenses 
of  General  Administration  and  should  be  charged  against  all  Policy- 
holders in  the  Company. 

Expenses  of  handling  the  funds  should  be  charged  against  the  funds 
and  will  thus  reach  the  indiyidual  Policyholders  in  proportion  to  their 
lespectiye  reseryes,  as  it  should. 

The  Expense  Journal  is,  tlierefore,  divided  into  three  parts: 

1st.  The  expenses  of  preiniiini  collection, 

2d,  The  expenses  of  general  administration, 

3d,  The  expenses  of  taking  care  of  the  funds. 

These  three. classes  of  expenses  should  be  kept  in  a  loose-leaf  journal 
with  tabs  indicating  the  locality  of  each  class, 

Tlie  subject  of  proper  classifications  of  expenses  will  be  more  care- 
fully considered  under  Dividend  Calculations. 

The  expenses  of  premium  collection  should  include  commissions, 
agency  salaries,  rents  for  agency  pur]>oses,  agency  supervision,  agency 
traveling  expenses,  agents'  licenses  and  other  agents'  expenses. 

Medical  expenses  are  not  properly  chargeable  against  premiums  or 
in  proportion  to  premiums.  But  Medical  expenses,  like  commissions  on 
first  premiums,  belong  to  first  year's  expenses  and  do  not  belong  to  the 
general  yearly  running  expenses  of  the  Company  .  The  Medical  expenses 
may  thus  be  considered  as  a  tax  upon  the  first  premiums  and  the  prac- 
tical results  in  dividends  to  Policyholders  will  be  practically  the  same 


I 


as  if  charged  against  all  Policyholders  alike.  We,  therefore,  put  Med- 
ical expenses  as  part  of  premium  collection. 

Under  the  expenses  of  general  administration  will  fall  the  salaries 
of  home  and  branch  officers,  rents  for  general  purposes,  furniture  and 
fixtures,  general  licenses  to  do  business,  g^eral  insurance  taxes,  traTei- 
ing  for  general  purposes,  postage,  telegrams,  express  charges,  exchange, 
messages,  printing,  stationery,  adyertising,  Stockhold^  dlTideada,  Di- 
rectors' expenses,  general  legal  expenses  and  all  expenses  that  r^te  to 
the  Company  as  a  whole  or  that  cannot  be  related  to  any  partiealar 
person  or  thing  or  class. 

The  expenses  of  taking  care  of  the  funds  include  taxes,  on  real  es- 
tate and  other  funds,  repairs,  trayeling  expenses  ftw  lo<A^  aft»  tiw 
funds,  legal  expenses  of  foreclosure  or  protecting  the  funds,  settling 
claims,  losses  and  depreciation  in  the  value  of  the  funds  and  oth^ 
expenses  of  handling  the  funds. 

We  give  here  the  forms  of  the  'Expense  Journal  tor  each  of  the 
three  classes  of  expenses.  The  ^tries  should  be  in  regular  double  ^try 
form.  The  aggregate  footings  only  at  the  ^  of  the  month  in  each  gen- 
eral column  will  go  forward  to  the  General  Ledger. 

The  sundries  column  will,  of  course,  be  indiyidually  posted  to  the 
General  Ledger. 

OollateraUy  as  usual  we  will  transcribe  such  of  the  indiyidual  items 
as  we  desire  as  mmoranda  to  the  Auxiliary  individual  accounts. 

The  Exp^ue  Journal  is  of  course  a  book  of  original  entry. 

Suppose  the  salary  of  the  Sup^nt^idenf  of  Agencies  is  paid  by 
check  on  Bank.  We  turn  to  the  Exp^  Journal,  Premium  Collections, 
etc.,  and  enter  : 

9^  Salary  Account—Agency.  Dr. 

To  1200  Bank. 
CollateraUy  we  transcribe  to  the  Personal  Ledger,  if  we  desire 
Suppose  the  Presidait's  salary  is  paid.   We  turn  to  Expenses  of 
G^eral  Administration  and  enter: 

Salary  Account — ^President.  Dr. 
To  1250  Bank. 
C<rflaterally  we  transcribe  to  the  Personal  Ledger,  if  desired. 


Suppose  a  fee  for  Mortgage  foreclosure  is  paid.  We  turn  to  Ex- 
pense of  Handling  the  Funds  and  enter : 

$].00  Legal  Expenses.  Dr. 

To  |100  Bank. 
Collaterally  we  transcribe  to  the  Individual  Account,  if  desired. 
The  aggregate  footings  only  go  forw  ard  into  the  General  Ledger. 
These  entries  are  so  simple,  further  illustration  is  not  necessary. 

EZPENSBS  OF  FBEMIUX  COLLECTION. 


CSSUTS. 

Date. 

Descriptions. 

Sundries. 

1 

Ooininifl- 

Agency. 

Medical. 

Descriptions. 

Sundries. 

Cash. 

Bank. 

New. 

Renewals. 

Salaries. 

Rents. 

Supervision. 

Traveling. 

Licenses. 

Advertising. 

Medical  fees 
and  Salaries. 

Inspection. 

EXPENSES  OF  GENEBAL  ADMINISTBATION. 


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XZFBH8E8  OF  TAXXVO  GABB  OF  THE  FUVBS. 


DEBITS. 

CREDITS. 

Date. 

Descriptions. 

Sundries. 

Taxes. 

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Profit  and  Loss. 

Other  Expenses. 

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Funds. 

THE  INSURANCE  TERMINATED  JOORKAI.. 

Haying  considered  Disborsem^ts  <hi  account  of  expenses,  we  now 
consider  Dit^araemaits  in  the  shape  of  Paymrats  to  P<di£7holde». 

We  consider^  first,  the  Insnrance  Terminated  Jonmal.  We  hei« 
give  the  form  for  the  Insnranee  Terminated  Journal.  This  is  a  book  of 
(Mginal  Eatiy. 

In  the  Insuranee  Terminated  Journal  we  cdiould  keep  separate 
diyisions  for: 

Whole  life  Insurance. 

Endowment  Insurance. 

T&rm  Insurance. 

Miscellaneous  Insurance, 
and  with  respect  to  each  of  the  foregoing  divisions  we  should  sub-divide 
as  far  as  ap{dicaUe  as  follows: 

Tmdnated  hy  Death. 

I^erminated  by  Maturity. 

Terminated  by  Expiration. 

l^ermlnated  by  Bunender. 

Terminated  by  Lapse. 

Terminated  by  Change. 

l^munated  by  Not  Taken. 

These  sub^iv^ons  are  easily  made  in  loose-leaf  Journals  by  con- 
t«dllng  Tabs  for  the  large  divisions  and  subordinate  tabs  for  the  smaller 
dlTisi<Mis. 

41 


The  DeseriptiTe  columns  in  tbe  fomi  of  tbe  Insurance  Terminated 
•loiimal  are  quite  complete  (see  the  forra^  as  th^  must  be  to  give  the 
necessaiy  inlorm.ation  for  the  entry. 

We  note  eolnnins  for  the  date  Terminated  and  the  Tolicj  year  and 
the  fraction.  I%i8  informaticHi  ia  needed  to  determine  the  Beserre  and 
Surrender  Value  and  the  amount  of  Deferred  Praniums  chargeaUe 
against  the  Policy,  if  any. 

INSUSANCE  TEBIUNATED  JOURNAL. 


ICtiKl  Of  F<riicy.  How  Terminated. 


DESCRIPTIONS. 

DEBITS. 

CREDITS. 

Q> 

1 
%. 

O 

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1  Po'lcy  number. 

1  Kind. 

E 

3 

E 

«• 

u 

Insured. 

Address. 

Age  at  Issue. 

Date  terminated. 

1  olicy  year. 

Fraction. 

Original  amount. ' 

Additions. 

1  Deductions. 

Amount  of  policy. 

Reserve, 

Surrender  value. 

Date. 

De.ecrlptlons. 

X 

b 

•o 
c 

3 

1 

1 

gg 

B 

o 

1 

o 

9. 

1  « 

U 

1  Sundries. 

Bank. 

Sundries. 

Debts 
Cancelled 

Used  to  Pay 
Premiuims. 

1  Policy  liens. 

1  Folicy  leans. 

1  Premium  notes. 

Deferred  Prem*. 

Sundry  Ins. 

Paid  up  additions. 

Paid  up  Ins. 

Extendhd  Ins. 

Annuities. 

.Supplementary 
Contracts. 

1  Uevived. 

1 

■ 

We  also  note  ccrfumns  for  the  Bes^ve  and  Bumaider  Values.  The 
ratio  between  the  aggregate  Surmader  Value  and  the  aggregate  Bm&nre 
shows  the  percoitage  of  Surrmder  Value  to  the  Rescnn^  and  thus  the 
proit  by  the  Company  from  Surrenders  and  Lapses. 

The  entries  on  the  Insurance  Terminated  Journal  must  be  in  regu- 
lar Bookheqiing  form,  as  on  all  the  Journals. 

If  there  is  no  Burraider  Value  and,  thanefofe,  nothing  paid  to  the 
Policyholder,  still  tiie  Insurance  Tmninated  should  be  entered  at  its 
proper  place,  notwithstanding  the  fact  that  the  dclrit  and  credit  columns 
will  remain  empty  with  respect  to  this  entry. 

The  debit  side  on  the  Insurance  Terminated  Journal  will  be  either 
ii  Death  Loss  or  a  Matured  Endowment  oir  a  Surrend^  Value. 

The  credit  side  will  be  a  check  equivalent  to  cash,  or  it  will  be  Debts 
cancelled,  such  as  Bills  Beceiyable,  Policy  Loans,  Policy  Liens,  Pranimn 
Notes  or  Deferred  Premiums,  or  it  will  be  Surrender  Values  used  as 
Premiums  to  purchase  other  Insurance,  or  it  will  be  combinations  of 
Uu-se. 

42 


If  surrender  values  are  used  to  purchase  Paid-Up  or  Extended  In- 
surance or  Annuities  we  have  a  "Change"  from  one  form  of  Insurance  to 
another  and  this  means  the  termination  of  the  one  kind  and  the  iflauaufi^ 
of  another  kind  of  Insurance. 

The  transaction  is  thus  double  and  for  completeness  should  be  Al- 
tered on  both  the  Insurance  Terminated  Journal  and  the  Pi«nium 
Journal. 

Only  the  aggregate  footings  at  the  end  of  the  month  will  go  forward 

to  the  General  Ledger. 

But  we  transcribe  to  the  Individual  Accounts  as  usual  when  desired. 
We  will  give  a  few  illustrations  of  entries  in  the  Insurance  Termi- 
nated Journal: 

# 

Suppose  a  Whole  Life  Policy  issued  at  age  30  f.)r  |!10,000,  Ordinary 
Life  Plan,  terminates  by  death  after  ten  annual  Premiums  have  hem 
paid;  and  suppose  that  |10,000  is  paid  in  full  settlement.  ' 

We  first  get  the  Policy  Ledger  Card  and  then  turn  to  the  Insurance 
Terminated  Journal  general  division,  "Whole  Life,"  and  to  the  sub- 
division "Terminated  by  Death"  and  fill  in  the  Descriptive  columns.  The 
Policy  ye^r  will  be  10  and  the  fraction  1,  showing  that  the  annual  Pre- 
mium  has  been  paid  in  full. 

On  the  debit  side  we  put  Death  losses  110,000  and  on  the  credit  side 
under  Bank  |10,000. 

*10,000  Death  Losses.  Dr. 

To  110,000  Check  on  Bank. 

After  making  the  entry  in  the  Insurance  Terminated  Journal  we 
transcribe  the  Termination  to  the  Individual  Policy  Ledger  Card,  giv- 
ing the  date  and  cause  of  death  and  the  settlement. 

We  file  the  PoUcy  Ledger  Card  in  the  Terminated  Insnrunee  for  the 

year. 

Again,  suppose  a  Twenty-Pay  Life  at  age  40  for  110,000.  Suppose 
this  terminates  by  death  the  Twelfth  Policy  Year,  after  the  third  quar- 
terly  Premium  payment  has  been  made. 

Suppose  the  quarterly  Premium  is  |100. 

We  get  the  Policy  Ledger  Card  and  turn  to  the  Insurance  Termi- 
nated  Journal,  "Whole  Life"  Insurance,  Tmina4«d  by  Death,  the  same 
ns  before,  and  fill  in  the  Descriptions.  Under  Policy  Year  we  put  12, 
and  under  Fractions      showing  that  only  %  of  the  annual  Premium 

it 


is  paid,  and  that  the  remaining  14  Deferred  Premium  remaining  as  a 
debt  due  the  Company.  Under  debits  we  put  Death  loss  |10,000,  and 
under  credits  Debts  cancelled,  we  put  flOO  for  the  Deferred  Premium, 
and  check  |9,900  to  balance : 

110,000  Death  losses.  Dr. 

•  To  |9,900  Check  on  Bank. 

100  Deferred  Premium  Cancelled. 

We  transcribe  the  Termination  upon  the  Policy  Ledger  Card,  giving  . 
the  date  and  cause  of  Death  and  settlement. 

We  file  the  Policy  Ledger  Card  in  the  Insurance  Terminated  Cabi- 
net for  the  year. 

Again,  suppose  a  Twenty- Year  Endowment  for  |10,000  at  age  55, 
matures  at  the  end  of  twenty  years,  during  the  life  of  the  Insured,  and 
suppose  a  Policy  loan  of  |3,000  matures  at  the  same  time: 

We  turn  to  the  Insurance  Terminated  Journal,  division  "Endow- 
ments'' and  to  the  sub-division  "Maturity"  and  fill  in  the  Descriptions 
and  enter  upon  the  debit  side  matured  Endowments  |10,000  and  enter 
upon  the  credit  side  under  Policy  loans  ^,000,  and  under  Bank  f 7,000 
check  for  the  balance: 

110,000  Matured  Endowment  Dr. 

To  17,000  Check  on  Bank. 

3,000  Policy  loans  cancelled. 

Again,  suppose  a  Term  Insurance  of  $5,000  expires  at  the  end  of  ive 
years,  during  the  life  of  the  insured : 

We  turn  to  the  Insurance  Terminated  Journal  Term  Insurance,  un- 
der the  sub-division  "Expiration/'  and  enter  the  d^ails  in  the  Descrip- 
tion columns.  The  debit  and  credit  e<rfimiii8  ifnll  remain  empty,  as  there 
is  nothing  paid  to  the  Insured. 

The  collateral  transcriblBg  will  be  as  nana]  in  the  above  examples. 

Again,  suppose  a  Ten-Pay  Life  Policy  for  |1,000,  3  per  cent  Re- 
serve, at  age  20»  sanaidered  «l  the  end  of  the  fifth  year,  the  Beswve 
being  |175.d0. 

Suppose  the  Surrender  valne  fl60  is  naed  to  purchase  Paid-Up  In- 
surance and  fflippose  a  IHridaid  flO  then  due  is  paid  in  Cash. 

As  nsoal  we  first  get  the  Policy  Ledger  card  to  oivtain  the  proper 
information  for  the  entries. 

There  are  several  ways  in  which  this  entry  may  be  made. 

44 


We  may  split  the  transaction  up  into  parts  and  enter  the  Dividaid 
on  the  Dividend  Journal,  the  Premium  on  the  Premium  Joomal  and  the 
Termination  on  the  Insurance  T^minated  Journal,  as  s^arate  and  in- 
dependent transactions. 

Or,  we  may  enter  the  whole  transaction  on  any  one  of  the  JonmaH 

whichever  we  please. 

But  the  best  way  is  to  use  both  the  Insurance  Terminated  Joomal 
and  the  Premium  Journal. 

Thus,  we  turn  to  the  Insurance  Terminated  Journal  divialoii  Wlmle 
Life,  sub-division  Snrrend«?ed  and  enter  as  foUowa: 


1^60  Surrender  Value.  ' 

10  Dividend.  Dr. 

To  $  10  Bank  (paid  dividaid). 

Surrender  valne  transfmmd 
to  Praninm  JmirnaL 


The  surrender  value  |160  on  the  credit  side  cancels  the  sorrrader 
value  of  1160  on  the  debit  side  and  shows  that  the  oitiy  has  heesk  trans- 
ferred to  the  Premium  Journal.  Otherwise,  we  nu^  make  the  entriea  in 
red  ink  as  memoranda,  or  we  may  even  leave  these  colomns  blank,  en- 
tering the  transaction  in  the  Pranium  Jonmal  alone^  hot  in  all  cases 
the  termination  should  be  entered  in  the  descriptive  columns  of  the 
Insurance  Terminated  Jonmal,  no  matter  wheth^  the  entry  is  trans- 
ferred to  the  Pr^nlum  Journal  or  not. 

On  the  Premium  Jonmal  under  the  Division  changed— paid-iai 
Insnrance— the  eatej  will  be: 

Surrender  value.  Dr. 
To  neO  Premium. 
We  may  make  a  separate  policy  card  for  the  paid-up  insurance,  or 
we  may  use  the  original  card  with  the  facts  noted  thereon.    In  either 
event  we  transcribe  the  prminm  payment  to  the  proper  card 

Suppose  an  Ordinary  Life  PoU<y  at  age  45  for  |1,000  terminates 
ijr  snrrender  at  the  end  of  the  seventh  year,  with  a  Reserve  of  |115.59. 
the  surr^der  valne  bdng  $130. 

Suppose  this  snrr^^  value  is  used  to  purchase  extended  insu- 
rance. 

We  obtain  the  Policy  Ledger  Card  as  usual  and  turn  in  the  Insu- 
rance Terminated  Jonmal  to  the  division  Whole  Life,  terminated  hy 

4& 


surrender,  and  from  the  Policy  Ledger  Card  fill  out  the  descriptions  in 
tke  Insurance  Terminated  Journal,    The  entry  will  then  be: 
|.130  Surrender  value,  Dr. 

To  fl30  Surrender    value    used  to 

purchase  extended  insu- 
rance. 

If  preferred  we  may  enter  the  $130  in  red  ink  on  the  debit  and  credit 
side,  or  may  leave  the  columns  blank  after  liaving  filled  in  the  descriptive 
column. 

The  termination  of  the  insurance  will  then  be  tFanseribed  to  the 
Policy  Ledger  card. 

We  next  turn  to  the  Premium  Journal  onder  the  division  Changed, 
extended  insurance,  and  make  the  entiy : 

$130  Surrender  value.  ]>r. 

To  1130  Premium. 
We  may  keep  a  separate  Policy  Ledger  Card  of  this  extended  insu- 
rance, or  we  may  enter  the  extension  <»i  the  original  card  to  repntmt 
the  extended  term  insurance. 

Again,  suppose  a  Twenty-Pay  Life  at  age  45  for  $1,000  terminates 
the  fifteenth  year,  the  Keserve  being  $500,  surrender  value  |450. 

Suppoieie  a  lien  under  a  general  contract  exists  for  $100  and  a  policy 
loan  evidenced  by  a  note  for  $100,  leaving  $250  available  balaneew  Sup- 
pose this  $250  is  used  to  purchase  paid-up  insurance. 

We  obtain  the  Policy  Ledgra*  Card,  turn  to  the  Insurance  Termi- 
nated Journal,  Whole  Life  surrendered,  and  aft^  fllling  in  the  descrip- 
tive columns  make  the  entry  as  fmikmn: 

f45d  Surrender  value.  Dr. 

To  $100  Policy  liens. 

100  Policy  loans. 

250  Surraider  values  used  to 

pay  j^wmiunw  for  paid-up 
inmiranee. 

If  preferred  we  may  oiter  the  $250  smender  value  credit  in  red 
ink  and  also  on  the  debit  side  $250  in  red  Ink  and  $200  In  black  Ink,  the 
red  ink  to  re^eeent  memmanda  and  not  book  entries,  or  we  may  leave 
the  $25a  blank  ratiiely  and  put  $300  debH  and  $200  credit 

We  transcribe  to  the  PoU^  Ledg^  Card  as  usual. 


We  turn  to  the  Premium  Journal  under  the  head  of  Changed,  paid^ 
up  insurance,  and  enter: 

1^  Surrender  values,  Br. 

To  1250  Premium, 
and  collaterally  transcribe  as  usual  to  the  Policy  Ledger  Card,  either  a 
new  card  or  we  retain  the  old  card  for  the  purpose. 

Again,  suppose  a  Fifteen-Pay  Life  Policy  at  age  40  lapees  at  the  end 
of  the  tenth  policy  year  with  a  Reserve  of  $440,  and  surrender  value  of 
$400,  and  suppose  extended  insurance  is  granted. 

We  obtain  the  Policy  Ledger  card  as  usual  and  turn  to  the  Insu- 
rance Terminated  Journal,  Whole  Life  Lapsed  and  aftw  filling  in  the 
descriptive  columns  make  the  entry : 

1^00  Surrender  values.  Br. 

To  $400  Surraider  values  used  to 

purchase  ext^ided  Insn- 
ance. 

We  may  put  the  $400  debit  and  $400  credit  In  red  ink  if  desired  as 
before,  or  leave  blank  after  filling  in  the  descriptitm. 

We  transcribe  the  entry  to  the  P<dicy  Ledger  card. 

On  the  Premium  Journal  Changed,  extimded  Insurance,  we  entw: 

Snrrend»>  value;  Br. 
To  $400  Premium. 

We  either  make  out  a  new  card  ext^ded  Insurance  and  enter  on  the 
new  card  or  retain  the  old  card  for  the  purpose. 

Suppose  now  that  within  the  time  aUowed  for  levlval  and  whHe  the 
extended  insurance  is  in  foiwe,  the  policyholder  bAm  a  revival  and  pro- 
duces satisf actoiy  evid^ce  of  good  health. 

The  extended  term  insurance  which  is  now  in  existence  must  be  can- 
celled on  the  Insurance  Terminated  Journal  and  the  original  policy 
revived.  ^  j 

As  usual  we  obtain  the  card  for  the  extended  Insurance,  either  the 
new  card  made  for  ^t  purpose  or  the  old  card  to  which  the  extended 
iiumrance  attaches,  and  turn  to  the  Insurance  Terminated  Journal  Term 
Insurance  Surrendered  and  after  filling  in  the  descriptive  columns  and 
ascertaining  that,  say  $50,  has  already  been  consumed  in  carrying 


47 


the  Extended  Term  Insnranee  to  date,  leaving  |350  as  a  balance  surren- 
der value,  our  entiy  will  be : 

|350  Surrender  value.  Dr. 

To  ^350  Surrender  value  used  to  re- 

vive old  insurance. 
As  before,  we  may  enter  the  $350,  both  debit  and  credit,  in  red  ink 
or  leave  these  columns  blank  after  filling  in  the  descriptive  columns. 
We  transcribe  to  the  Policy  Ledger  Card  as  usual. 
We  turn  to  the  Premium  Journal  under  the  head  of  Revived  Insu- 
rance and  assuming  that  the  back  premiums  to  be  paid  in  cash  amount 
to  $100  in  addition  to  the  $350  surrender  value,  for  the  Extended  Term 
Insurance,  our  entry  will  be: 

$100  Cash. 
350  Surrender  value.  Dr. 

To  $450  Premium. 
We  transcribe  to  the  Ledger  Card  as  usual. 

In  the  column  headed  Reserves  in  the  Insurance  Terminated  Jour- 
nal we  must  put  the  Reserves  upon  each  Policy  Terminated,  and  in  the 
column  headed  Surrender  Values  we  put  the  entire  Surrender  Value 
provided  in  the  Policy  without  regard  to  any  of  the  liens  or  loans  or 
debts  due  by  the  Policyholder  to  the  Company. 

The  aggregate  footing  of  the  Beserve  column  will  show  the  aggre- 
gate Reserves. 

The  aggregate  footing  of  the  Surrender  columns  will  show  the  Sur- 
render Values  allowed.  The  difference  between  these  shows  the  profit 
realized  by  the  Company  from  Lapses  and  Surrender. 

The  Insurance  Terminated  Cards,  after  the  termination  Insurance 
f^ntries  have  been  made  on  all  the  books,  will  be  placed  aside  in  the  In- 
mnance  Terminated  Card  ealnnet  for  the  year,  and  will  there  remain  to 
tlie  end  of  the  year. 

At  the  end  of  the  year  all  the  Terminated  Cards  will  be  taken  from 

Terminated  cabinet  and  will  be  classified. 

First  AoeoidiBg  to  kind  of  Inmmoieey  and  aeccHidy  according  to 
nfwatoitry. 

Tkgm  terminations  will  then  be  entered  in  this  order  on  the  Insn- 
mmee  C^Maifteil  Booka,  wkiek  we  will  eiplain  ]at». 


48 


TBE  DiVlDBRD  JOURHAL. 

The  Dividend  Journal  also  represents  payments  to  Pt^i^holdera. 
We  give  here  a  convenient  form  for  this  Journal. 

As  in  all  the  Journals  the  entries  must  be  in  r^^ar  Double  Entiy 
form. 

Where  the  Dividend  is  used  in  reduction  of  Premiums  the  entire 
entry  should  be  made  on  the  Premium  Journal,  as  we  consider  the 
Premium  Journal  the  controlling  Journal.  However,  columns  are  pro- 
vided to  enter  Dividends  in  reduction  of  Premiums  on  the  Diyidend 
Journal,  if  desired. 

If,  however,  the  Dividend  used  as  a  Premium  is  ^tered  upon  the 
Dividend  Journal  it  should  be  transferred  to  the  Premium  Journal  so 
as  to  keep  the  Premium  Journal  complete.  The  facts  would  thus  be 
shown  on  both  the  Dividend  Journal  and  the  Premium  Jonmal.  but  the 
debit  and  credit  on  the  Dividend  Journal  being  the  same  would  cancel 
each  other.  Othen»vise  they  may  be  entered  in  red  ink  in  the  DiTide^d 
Journal  as  memoranda  only. 

All  cash  Dividends  will  naturally  come  on  the  Dividend  JoumaL 
Thus: 

$50  Dividends.  Dr. 

To  $50  Cash, 
would  go  immediately  upon  the  Dividend  Journal  and  would  be  col- 
laterally transcribed  to  the  Individaal  Poliq^  Ledger  Card. 


DIVIDEND  JOURNAL. 


DDBCRIPTIONB. 

DBUiTS. 

CRBDfTB. 

Date  of  Policy. 

Number. 

Kind. 

Premium. 

Issued. 

Original  Amount. 

Additions. 

Deductions. 

Amount 
of  Policy. 

Age  at  Issue. 

Policy  Year. 

Fraction. 

Dividend  Rate. 

Amount  of 
Dividend. 

Date. 

Description. 

Sundries. 

Dividends. 

Desoriptiong. 

Sundries 

Bank. 

Used  as 
Premiums. 

Reduction  of 
Premiums. 

I'aid  Up. 

Annuities. 

4t 


Again,  a  $25  dividend  paid  in  reduction  of  Premiuiris  had  best  go 
directly  upon  the  Premium  Journal,  but  we  may  enter  it  on  the  Divi- 
dend Jonmal  as  follows  (in  red  ink,  as  a  memorandum  only,  if  pre- 
ferred): 

|25  *        Dividend.  Dr. 

To  |25  Dividend,  used  in  reduction 

of  Premiums. 

Tile  debit  and  credit  of  Dividends  on  the  Dividend  Journal  cancel 
each  other,  and  we  then  make  the  regular  entry  upon  the  Premium 
Jonmal : 

|25  Dividend.  Dr. 

To  125  Premium. 

ANNUITY  AND  SUPPLEMENTARY  CONTRACT  JOURNAL. 

This  Journal  also  represents  pfQrmeiitB  to  PoliejholderB.  We  here 
give  the  form  of  the  Ammity  and  Bappleaimisary  Contract  Journal. 

It  is  intended  to  cover  paymmtM  to  Policylioldm  on  Annuities  and 
on  contracts  that  hare  matored  into  claims,  bnt  which  are  being  paid 
annually  or  being  diseha^  by  Siq^piisietttaiy  Contniets. 

The  entries  npon  this  Journal,  as  upon  all  the  o4to  Jonmals,  are  in 
ffl^r  DonMe  Entry  Hom. 

AXVUZT7  An  SOmjOnVTABT  OOVTBAOT  JOUBVAL. 


Kind  of  Policy 


mmcBiFTHyHB. 

DKB1T8. 

CtUfiOlTS. 

f 

Date. 

Policy  Number. 

Kind  of  Policy. 

Insured. 

Address. 

Amount. 

a 
Q 

Descriptions. 

Sundries. 

Descriptions. 

Bank. 

Sundries. 

Thus,  suppose  an  Annuity  Certain  for  twenty  years  is  being  paid 
in  discharge  <tf  a  Death  Loss,  the  yearly  annual  payment  on  the  Annui^ 
being  |600 : 

The  entry  for  a  single  payment  will  be : 

1600  Annuity  Certain.  Dr. 

To  1600  Cash. 
Again,  suppose  a  widow  is  drawing  an  Annuity  of  $1,000  per  year 
during  the  balance  of  her  life,  in  payment  of  a  Death  Loss  npon  her 
nnsband's  life : 

The  ^try  for  a  single  payment  will  be : 

fl^OOO  Life  Annuity,  contingait.  Br. 

To  11,000  Cash. 
The  collateral  transcribing  to  the  Individual  Accounts  will  be  as 
osuaL 

THE  GENERAL  LEDGER. 

The  O^ieral  Ledger  may  be  of  the  form  in  common  use.  We  prefw 
Che  Loose  Leaf  Ledger,  clearly  indexed  by  tabs. 

There  is  nothing  peculiar  in  a  Life  Insurance  Ledger  that  dislfai- 
iniishes  it  necesmrily  from  other  Led^^. 

We  i\ote,  howerer,  that  the  aggtei^te  results  on  the  G^Mral  Ledger 
are  split  into  itmised  particulars  on  tiie  special  Ledgers,  such  as  the 
Ag^t's  Special  Ledger,  etc. 

There  should  also  be  a  le^ial  Ledg»  for  real  estate  and  real  estate 
loans  and  long-time  collateral  loans,  coYering  s^^arate  diyisions  for  Hm 
insurance  policies,  int^est  and  rent  payra^ts,  repairs,  etc 

As  the  forms  of  these  hare  nothing  peculiar  to  do  with  Life  Insii- 
ranee  we  ref^  the  reader  to  real  estate  companies,  to  mortgage  loana 
companies  and  to  Banks  for  the  best  franms  of  these  books.  They  m 
all  veiy  simple.  The  ingenuity  of  the  reader  can  readily  devise  forms  of 
his  own. 

BANK  AND  CASH  ACCOUNT. 

We  give  here  the  form  for  combined  Bank  and  Cash  Account,  bring- 
ing together  in  one  pl^^^^ik  and  Cash  entries  for  each  day.  The 
classification  fc^ows  IMMHHIIbations  of  the  Journals.  On  the  credit 
side  will  be  found  the  two  great  sources  of  Income,  Premiums  and  In- 


51 


terest.  On  the  debit  side  will  be  found  the  two  great  sources  of  Dis- 
bursements, Expenses  and  Payments  to  Policyholders. 

The  Sundries  columns  both  debit  and  credit  are  intended  to  cover 
special  entries  that  do  not  fall  satisfactorily  into  any  of  the  special 
columns  named. 

The  Bank  and  Cash  Account  is  an  Auxiliaiy  Book  that  is  intended 

merely  as  a  memorandum. 

The  balances,  however,  should  correspond  with  the  aggr^ate  Caah 
and  Bank  balance  on  the  General  Ledsrer. 

By  this  Bank  and  Cash  Account  the  Bank  and  Cash  should  be  daily 
balanced. 


BANK  AND  CASH  ACCOUNT. 


CREDITS. 

Date. 

Descriptions. 

at 

® 

« 

3 

m 

s 

Bank. 

Expenses. 

Payments  to 
Policyholders. 

Investments. 

Descriptions. 

Sundries. 

Cash. 

Bank. 

Premiums. 

Interest  and 
Rents. 

Investments. 

AGENT'S,  PERSONAL  LEDGER. 

If  deslied  an  Afmt's  Pmonal  IndiTidiial  Ledger  may  be  kept,  with 
two  debit  eolmnns  and  two  credit  columns,  one  for  Personal  Account 
and  one  for  the  Poiicy  Aeeovuity  betidei  the  nanal  colnmns  for  tbe 
date  Bad  tbe  iteniaed  partieiihuni  or  descriptions. 

In  the  Personal  Account  we  will  put  the  debits  and  credits  on  the 
Pnv^  Personal  Account  ot  tbe  Agent 

In  tbe  Policy  Accofmt  we  win  put  tbe  debits  and  credits,  which, 
tboni^  now  perwmal  to  tbe  Agent,  haye  tb^  origin  in  tbe  Policy  Ac- 
count. 

Tbe  Agent's  Personal  Ledger  will  represent  the  itemized  particu- 
lars, of  wbicb  tbe  aggregates  belong  to  the  General  Ledger  under  the 
genefii]  bead  '^Ageiif a  BaUoiees.'' 


AOBNT'S  PBBSONAL  LSDOEB. 


*    DBBITfr  NAMBOrAOENT  CRBDIT& 


Date. 

Description. 

Personal  Acct. 

1 

Policy  Acct. 

Date. 

Description. 

Personal  Acct. 

Policy  Acct. 

• 

RECORD  OF  CLASSIFIED  INSURANCE. 

We  give  here  the  form  of  the  Record  of  Classified  Insurance. 

All  the  Insurance  that  is  written  during  the  year  will  be  classified 
by  cards ;  first,  according  to  the  kind  of  Policy,  and  second,  according  to 
the  age  at  issue. 

This  is  best  understood  by  an  illustration. 

For  the  year  1900  we  put  into  one  cabinet  cards  representing  all 
the  Policies  written  during  the  year  on  the  Ordinary  Life  Plan. 

We  then  assort  these  cards  by  ages. 

We  thus  have  in  one  cabinet  all  the  Policies  on  the  (MlBtiy  LIIb 
Plan  issued  in  1900,  arranged  by  ages,  21,  22,  23,  etc. 

On  the  record  of  Classified  Insurance  we  record  these  in  order, 
giving  first,  the  Number  of  the  Policy,  beginning  at  the  lower  age,  say 
age  20,  and  continuing  through  all  the  ages,  21,  22,  23,  etc.,  in  ordi^,  and 
write  the  amounts  of  Insurance  in  one  column,  which  column  we  must 
designate  at  the  top,  as  cal^dar  year  1900 — Policy  year  one. 

This  record  thus  gives  us  a  complete  exhibit,  arranged  in  order  of 
ages,  of  all  the  Ordinary  Life  business  written  in  the  year  1900. 

At  the  end  of  the  year  1900  we  ascertain  the  Policies  that  have  ter- 
minated by  Lapse,  Surrender  or  Death  or  otl^rwise  dnring  the  year. 

This  is  ascertained  from  the  cabinet  containing  tbe  Iiedfer 
Terminated  Cards. 

ss 


We  write  opposite  each  Tennination  the  date  and  manner  of  Ter- 
mination and  at  the  beginning  of  the  next  year,  1901,  which  will  be  the 
Second  Policy  year,  we  bring  forward  all  existing  Policiee  into  the  next 
column,  1901;  which  we  will  deaijpuUe  as  Catendar  ymt  1901,  P^dky 
year  two. 

At  the  end  of  1901,  which  is  the  Second  Policy  year,  we  in  like  man- 
ner ascertain  the  Terminations  during  the  year  from  the  Policy  Ledger 
Cards,  in  the  Terminated  cabinet  for  the  year,  and  we  bring  lorwaid 
the  existing  in  the  next  column,  which  we  designate  as  Oal^dar  year 
1902,  Policy  year  three.  We  keep  this  up  year  by  year  until  aB  the  Oidi- 
naiy  Life  Policies  issued  in  1900  hsTe  Terminated. 

XaOOBD  07  CLASSmED  INSURAITCE. 


Kind  of  Policy 


Number. 

u 

< 

CaLTr. . . . 
PoLTr.... 

CaLTr.... 
FoLTr. ... 

C«.Tr.... 
PoLTr  

Crt.Tr.... 
PoLTr. ... 

CaLTr — 
PoLTr  

CaLTr — 
PoLTr.... 

CaLTr  

Pol.Tr. . . . 

Cal.Yr  

P<d.Tr  

Cal.Tr..,. 
PoI.Tr  

CaJ.Yr  

P<»I.Tr. . . . 

Similarly  for  the  Ordinaiy  Life  Policies  for  which  1901  is  the  lirst 

Policy  vear. 

And,  similarly  for  the  Ordmaiy  Life  Policies,  for  which  1902  is  the 
first  policy  year,  and  so  on. 

Not  only  for  the  Ordinary  Life,  but  we  do  exactly  the  same  thing 
for  the  Twenty-Pay  Life,  for  the  Fifteen-Pay  Life,  for  the  Teii-Fa>y 
Life  and  for  all  Endowments  and  for  all  Term  Polieica  and  for  all  other 
Policies.  • 

If  the  Policy  is  increased  or  decreased  in  «monnt,  still  rraudnlng 
of  the  same  class,  such  as  a  Premium  Addition  Policy,  we  may  leaye 
two  lines  for  each  PoUej  Tfomdng  the  <Nriginal  amount  along  one  luiii- 
zontal  line  and  the  increase  or  deevease  in  red  ink,  if  preferfed,  akmg 
the  adjoining  horisontal  line. 

If  the  increase  is  a  Paid-Up  Dividend  Addition  this  Paid-Up  Addi- 
tion will  belong  to  a  different  class  of  Insurance  from  the  original, 
unless  the  original,  too,  is  now  Paid-Up.  The  Paid-Up  IHyidend  Addi- 
tions must,  therefore,  in  genml  go  into  a  difliereBt  class  and  cm  a  dif- 
fmnt  page. 


IN 


The  Record  of  Classified  Insurance  is  used  to  prepare  the  classifica- 
tions for  Besenres  and  Mortality  and  Lapse  rates,  and  for  other  pur- 
poses. , 

These  classifications  should  be  kept  as  permanent  records. 

A  convenieit,  perhaps  the  best,  way  to  enter  terminations  on  tiie 
Classified  Insurance  book  is  as  follows: 

Arrange  in  num^ical  order  the  Terminated  Policy  Ledger  Cards 
for  the  year.  Begin  at  the  beginning  of  the  Insurance  Terminated  Jour- 
nal and  see  that  e¥&ey  eatrj  on  the  Insurance  Tmninated  Journal  is 
repres»ited  by  a  card.  Classify  the  Terminated  Cards  in  the  same  way 
that  Uie  Insurance  Classified  Book  is  classified.  Entw  the  Termina^ 
tions  on  the  Insurance  Classified  Book. 

This  may  be  dime  mimtlily,  if  desired,  instead  of  yearly. 

RESERVES  AND  DIVIDENDS. 

We  give  here  the  form  to  be  used  for  the  Reserve  and  Divid^id 

Calculations. 

With  regard  to  the  Res^es,  we  need  only  those  Policies  tlmt  were 
in  existence  at  the  end  of  the  year. 

With  regard  to  the  Dividends  we  need  only  those  Policies  that  wem 
in  force  at  the  end  of  the  year,  provided  the  Policy  must  be  in  fooee  In 
order  to  draw  its  Dividend. 

If  the  Policy  draws  its  Dividend  whether  in  force  ot  not,  we  need 
for  DividaMi  calculations  'all  the  Policies  in  force  at  the  beginning  <rf 
the  year. 

BSSBBVES  AND  DIVIDENDS. 


Kind  of  Potley  Reserve  Basts 


Year  Issued. 

Year  Calculated. 

Policy  Year. 

Ag:e  at  Issue. 

Number. 

Amount  of  Insur- 
ance In  Force. 

1  Reserves. 

Dividends. 

Mean  Rate. 

Amount. 

Rate. 

1 

Amount. 

For  the  purpose  of  Reserves  and  Dividends  we  take  the  facts  from 
the  record  of  Classified  Insurance,  but  we  consider  as  one  Policy  all 
Policies  of  the  same  kind  that  were  written  in  the  same  calendar  year 
and  at  the  same  age. 

murtilitt  aid  lafss  ratbs. 

We  give  here  the  form  for  the  calculation  of  the  Mortality  and 
Lapse  rates.  The  facts  will  be  taken  from  the  Record  of  Classified  Insu- 
rance, but  for  the  year  of  calculation  we  will  need  the  amoonts  of  Insii- 
ranee  in  force  at  the  beginning  of  the  year. 

We  will  also  need  the  Lapises,  Sorrenders  and  Deatlw  oeeorrtiig 
during  the  year. 

We  will  consider  as  one  Policy  all  Policies  of  the  same  kind  that 
were  issued  in  the  same  Calendar  year,  and  at  the  same  age. 

This  table  will  show  the  rate  of  Mortality  for  each  kind  of  Policy 
and  Policy  year;  first,  as  expected  from  the  Table;  second,  as  expected 
from  the  Table  after  allowing  for  Medical  Selection;  and,  thiid,  am  ac- 
tually experienced  by  the  Compugr. 


Kind  of  Policy.  Reserve  Basis. 


Year  Issued. 

Year  Calculated. 

Policy  Year. 

Age  at  Issue. 

Number. 

Amount  of  Insurance. 

TttrmlBAted. 

•6 
« 
■<-> 
d 
s 

s 
& 

Eh 

"5 

t 

Mean  Bbcposures  During  Tear. 

Reserve  Rates. 

Terminal  Reserves. 

At  Rislc 

TWndar. 

M«dl«L 

By  Death. 

By  Lapse  and  Sur. 

Rate. 

Expected  Loss. 

Rate. 

Jmtl 

Expected  Loss. 



II 

56 


* 


coMPLsmro  the  recor]>s  axd  balaxchig  the  woosa. 

In  Life  Insurance,  as  in  all  other  businesses,  the  opening  entry  is 
made  by  putting  the  assets  on  the  left,  in  the  debit  column,  and  the 
liabilities,  including  stock  and  surplus,  on  the  right  in  the  credit  column- 

At  the  end  of  every  year  the  books  should  be  balanced  and  into  the 
new  year  there  should  be  brought  forward  nothing  except  the  assets  and 
liabilities,  leaving  Profit  and  Loss,  etc.,  behind,  in  the  same  way  as  if  the 
Company  were  entering  upon  a  new  business  the  new  year. 

After  a  Life  Insurance  Company  begins  business  there  will  arise 
certain  classes  of  assets  and  liabilities  which  appertain  to  Life  Insu- 
rance only. 

Among  the  assets  will  appear  Policy  Loans,  Policy  Liens,  Premium 
.Notes,  Agent's  Balances,  etc. 

And  among  the  liabilities  will  appear  Legal  Reserves,  Surplus  to 
Policyholders,  etc. 

During  the  year  the  Company  will  collect  Premiums  and  Interest. 
These  constitute  the  two  sources  of  income.  And  as  these  sources  of 
iiic<nne  are  paid  to  the  Company  the  entries  will  be : 

Cash 
To  Premiums. 

and 

Cash 
To  Interest. 

Premium  as  used  aboTe  means  premium  obligation  receivable. 
As  the  business  progresses  during  the  year  the  Company  will  pay 
out  e]q)enses  and  will  make  payments  to  Policyholders  in  conformity  to 
the  contracts  and  as  part  of  the  regular  eoorse  of  business.    These  en- 
tries will  be  of  the  form : 

Expenses  of  Prmium  Collection. 
To  Cash. 

Expenses  of  General  Administration. 

To  Cash. 
B:q^ai8es  of  handling  the  funds. 

To  Cash 

and  the  payments  to  Policyholders  will  be  of  the  form: 
Death  losses. 
To  Cash. 

67 


Matured  Eodowments. 

To  Cash. 
Ammity  payments. 

To  Cash. 
Surrender  Values. 

To  Cash. 
Dividends. 

To  Cash. 

Of  course,  instead  of  cash,  anything  else  may  appear  in  the  above 
entries. 

Premiums  and  interest  are  paid  to  the  roinpany  under  a  trust  to 
defray  expenses  and  to  pay  Policyholders.   If  we  were  to  embody  this 
in  a  book  entry  it  would  be  of  the  form : 
Premiums. 
Interest. 

To  Expenses. 

To  Payments  to  Policyholders. 
This  entry  would  to  a  large  extent  balance  the  reverse  entries  just 
made. 

But  this  latter  entiy  need  not  in  fact  be  made.  We  may  accomplisli 
the  result  in  a  simpler  manner  as  follows : 

The  following  accounts  at  the  end  of  the  year  must  be  balanced  into 
profit  and  loss;  to-wit:  Premiums,  Interest,  Expense  Accounts,  Death 
Losses,  Matured  Endowments,  Annuity  Payments,  Surrender  Values 
and  Dividends. 

At  the  end  of  the  year  the  real  estates  should  be  credited  with  the 
balance  on  hand,  either  at  the  old  book  values  or  at  new  values  if  desired 
by  the  Company,  and  the  account  balanced  into  profit  and  lass,  the  bal- 
ance of  the  Real  E.state  being,  carried  forward  into  the  next  year. 

Heal  estate  mortgages  will  be  balanced  into  the  balance  aeeoioit  and 
the  balance  carried  forward. 

Similarly,  collateral  loans,  bills  receivable,  personal  accounts,  "mh 
and  other  similar  assets  will  be  carried  forward  as  balances. 

If  bonds  and  stocks  are  listed  at  fluctuating  market  Talues  the  new 

market  value  at  the  end  of  the  year  may  be  carried  forward  as  balances 

and  the  accounts  balanced  into  profit  and  loss. 

Bills  payable  will  go  forward,  of  course,  for  their  full  value  as  11- 
abiliUes. 

m 


Tbe  old  Contingency  Reserve  will  fie  balanced  into  profit  and  loss  1^ 
an  eii1a7  of  the  f  onn : 

Old  Ck>ntingency  Beserve.  Br. 
*f  o  Profit  and  Loss, 
and  the  new  Goniangency  Bteenre,  the  amount  of  which  will  he  cal- 
culated by  the  Aetnaiy,  will  be  l»ought  into  existence  on  the  books  an 
entry  of  the  form: 

Profit  and  Loss. 

To  New  Contingency  Besarve. 
Similarly,  the  old  Legal  Reserve  will  be  balanced  into  Profit  and 
Loss  by  an  ^tiy  of  the  fofm: 
Old  Legal  Beserve 

To  Profit  and  Loss, 
and  the  new  Legal  Beserve^  the  amount  of  which  will  be  calculated  by 
the  Actuary,  will  be  brought  into  existence  on  the  hookB  by  an  entry  of 
the  form; 

Profit  and  Loss. 

To  New  Legal  Reserve. 
Thus,  the  new  Ccmtingency  Beserve  and  the  new  Legal  Resttrve  coma 
forward  as  liabilities. 

Stock  dividends  and  other  payments  due  to  Stockholders  are  properly 
chargeable  as  expenses  of  General  Administration  and  thus  come  for- 
ward in  effect  as  liabilities  against  the  Company  and  in  favor  of  tha 
Stockholders. 

The  Contingency  Reserve  entries  will  have  consumed  as  much  of  the 
profit  or  savings  as  is  necessary  for  a  Contingency  Beserve  and  the  en- 
tire remaining  profit  and  loss  is  then  Divisible  Surplus  to  be  paid  or 

credited  to  the  Policyholders. 

We  thus  finally  balance  profit  and  loss  into  divisible  surplus  which 

is  brought  forward  as  a  liability. 

We  open  the  new  books,  therefore,  for  the  new  year  in  exactly 
the  same  way  as  we  open  the  books  at  the  beginning  of  the  business. 

The  assets  on  hand  at  the  beginning  of  the  year  are  charged  to  the 
liabilities  on  hand  at  the  beginning  of  the  year  and  all  accounts  that  do 
not  represent  assets  or  liabilities  are  left  behind  on  the  old  books. 


Sf 


CHAPTER  m. 


CONCLUSIONS  FROM  THE  FACTS. 

The  facts  having  been  ascertained,  classified  and  recorded  the  next 
thing  is  to  draw  conclusions.  These  conclusions  consist  of  mathematiciil 
calculations  and  conclusions  of  law. 

Among  the  most  important  mathematical  calculations  are  the  Legal 
Reserve,  the  Contingency  Reserve,  the  Net  Divisible  Surplus  and  those 
fundamental  ratios  which  constitute  the  basis  of  dividend  calculations. 

The  conclusions  of  law  consist  in  determining  the  rights  and  li- 
abilities of  the  parties  upon  the  facts  thus  disclosed. 

LEGAL  RESERVES. 

When  a  Life  Insurance  Company  signs  a  Policy  the  Company  be- 
fomes  liable.  But  what  this  liability  at  the  present  time  is  in  dollars 
and  cents 'on  this  particular  policy,  nobody  can  tell;  for  nobody  can  tell 
Iww  long  the  Policyholder  will  live,  nor  how  soon  he  may  die,  nor  when 
tiie  Company  will  have  to  pay  the  claim. 

Thus  in  Life  Insurance  Bookkeeping,  as  we  have  seen,  this  Policy 
is  not  entered  at  once  upon  the  books  as  a  bill  payable,  but  the 
liability  is  apparently  left  off  the  records  until  the  death  actually  occurs. 

But  the  liability  is  only  apparently  left  off  the  records.  The  Li- 
ability really  appears  on  the  records  in  another  form  disguised  in  the 
Rhape  of  the  Legal  Reserve  liability. 

The  Legal  Reserve  laws  artificially  convert  a  future  contingent  un- 
known liability  into  a  present  certain  known  artificial  liability. 

The  L^al  Reserve  liability  upon  any  policy  at  any  time  is  arti- 
ficially defined  by  law  to  be  the  net  single  premium  that  will  be  required 
to  purchase  the  contract  at  the  present  age  of  the  insured,  less  the  pres- 
ent value  of  future  net  preoiiums,  by  the  interest  rate  and  mortally 
table  fixed  by  the  law. 

It  will  be  thus  seen  that  by  conventional  rules  more  or  less  artificial 
an  artificial  value  is  put  upon  the  Policy ;  to-wit :  the  single  premium  at 
the  interest  rate  and  mortality  table  fixed  by  the  law,  and  the  Company 
is  charged  this  amount,  but  the  Company  is  at  the  same  time  credited 


all  future  net  pr^iums;  the  value  ol  which  is  determined  in  tlie 
same  artificial  manner. 

In  speaking  of  the  Legal  Beame  laws  as  artificial  and  conventional, 
no  disrespect' is.  meant  In  the  abs^ce  of  an  artificial  or  eonyentional 
mle  there  is  no  way  to  convert  a  future  conting^t  unknown  liabilil^ 
into  a  present  certain  known  liability. 

But  in  Accounting  it  is  of  the  utmost  importance  that  the  true  arti- 
ficial and  conventional  nature  of  the  Legal  Reserve  method  of  Valuati  'U 
abonld  be  fully  admitted  and  apj^iated.  OOerwise  Accounting  wlU 
be  more  or  less  deffectiva 

The  object  of  artificial  conventional  rules  should  be  to  fit  the  facts 
and  arrive  at  truth  in  tpe  simplest,  easiest  way.  If  artificial  conven- 
tional rules  do  not  fit  the  facts  and  do  not  yield  the  truth  they  are  of 
little  value. 

i.nltss  the  true  nature  of  the  Legal  Reserve  laws  are  appreciated 
And  unless  they  are  applied  in  the  ri^t  way  and  qualified  in  the  right 
way  th^  may  produce  a  great  deal  of  harm  and  perhaps  more  harm 
than  good.  The  Legal  Bmme  laws  require  that  each  C<Mnpany  shall 
have  on  hand  at  all  times  in  Admitted  Assets  the  full  amount  of  the 
I^egal  Reserve  and  if  the  Company  fails  to  do  so  the  C<Httpany  is  declared 
by  law  technically  artificially  insolvent,  whethCT  the  Cmpai^  is  reaUy 
insolvent  or  not 

The  ability  to  comply  with  the  Legal  Reserve  law  is  no  true  teat  of 

solvency.  A  Company  may  be  thoroughly  solvent  and  yet  not  able 
to  comply  with  the  Legal  Reserve  Law.  On  the  contrary,  an  insolvent 
Company  may  be  able  to  c(Mnply  with  the  Legal  Reserve  Law. 

One  Company  may  have  a  low  exp<Mise  rate,  a  low  mortality  rate 
and  a'  high  interest  rate,  and  may  thus  be  earning  large  Dividends  sd 
taat  if  let  alone  it  may  be  amply  able  to  carry  out  all  its  contracts  with 
its  Policyholders  and  pay  good  Dividends,  besides.  Yet  at  the  present 
time  it  may  be  short  a  few  Dollars  on  its  Legal  Reserves.  If  so,  it  will, 
by  the  L^l  Reserve  Laws,  be  put  at  once  out  of  bnsiness. 

Another  Company  may  have  a  hig^  ezp^ise  rate^  a  high  mortality 
rate  and  a  low  interest  rate,  and  may  thus  be  running  at  a  heavy  loss. 
Yet  it  may  have  on  hand  the  Legal  Reserve  at  the  praimt  time.  Sndi 
a  Company,  under  the  Legal  Reserve  Laws,  will  be  allowed  to  continue 
business  though  itf  in^lvency  in  the  near  future  is  inevitable 


Our  object  is  to  develop  what  «ie  the  true  tests  of  a  Ck^mpany's  aol- 
v&uy  and  inaolyeii^. 

TH£  CONTINGENCY  RESERVE. 

The  object  of  the  Gcatlngeacy  Bctem  Is  to  pzofide  against  mi- 
looked  for  flaetiiatioiis  hi  the  muket  vahns  of  the  assets  and  in  the 
Interest  rate  and  in  the  mortality  ezpttience  of  the  Compai^  and  against 
other  unlooked  for  ccoitlngenclesL 

The  GotttingHiqr  Bescm  is  a  Safety  Fond  or  Margin.  The  object 
is  to  keep  the  assets  hi  mem  of  the  Legal  Beaerre  and  other  liabilities. 
By  law  the  Legal  Beeerre  is  made  the  Bead  Line,  which,  if  the  Company 
touches  it  becomes  teehnlcaify  or  artJfldalfy  insotfcnt  whether  It  is  real- 
ly insolvent  or  not 

While  the  Oontingeacy  Beserve  Is  of  great  importance  in  all  busi- 
nesses, it  Is,  ibeteteire,  am  aeconnt  of  the  technical  artificial  Legal  Re- 
serFe  laws  of  peculiar  Importance  In  JAte  Insorance.  The  Contingency 
Beserte  onght  to  be  ttoroi^^  defined  and  a  determinate  standard 
of  Safely  established. 

PROPORIIOHAL  TO  FLUCTUATION& 

The  object  of  the  Contingency  Reserve  being  to  provide  against  11  uc- 
toatiQas  the  Contingency  Besme  ought  to  be  proportional  to  the  mean 
tnctnatkms.  This  Is  self  evidait 

TMH^^Btctnation  In  the  market  valne  of  the  assets  must  be 
found  MH^^Bbsorvation. 

ilBpa  »«wt  is  purchased  the  book  value  should  be  made  to 
coBfotm  as  accurately  as  possible  with  the  true  value.  Each  year  the 
valne  at  the  aid  of  the  year  should  be  compared  with  the  book  value  and 
the  mean  fluctuation  noted.  At  periods,  if  desired,  the  book  values  may 
be  changed  to  suit  actual  values.  The  mean  yearly  fluctuations  should 
be  put  in  the  Company's  Statements. 

The  fluctuation  rates  in  each  class  of  security  for  different  years 
should  be  squared  and  the  mean  of  these  squares  found.  The  square 
root  of  this  mean  may  be  called  the  mean  fluctuation  in  that  particular 
diaract<9r  of  assets. 

Likewise^  the  mean  fluctuation  rate  in  the  rate  of  interest  should  be 
noted  each  year  and  the  per  cent  of  variation  from  the  mean  found. 

o 


The  fluctuation  rate  in  the  mortality  ezporience  of  the  Company  is 
ai^arently,  though  not  really,  discovered  in  quite  a  dlffHoit  wvy.  It 
may  be  shown  by  mathematical  demonstration  that  the  mean  fluetair 
tion  rate  in  the  mortality  losses  is  approzhnatdy  equal  to  the  avmgs 
amount  at  risk  per  policy  (the  face  value  of  the  policy  less  the  Besem), 
multiplied  by  one-tenth  the  square  root  of  the  number  of  poUdes  In 
force. 

Thus,  if  (I)  equals  the  average  amount  of  Insurance  per  Policy  and 
(B)  the  average  amount  of  Beserve  per  Policy  and  (N)  the  numbor  ol 
policies  in  force,  the  mean  fluctuation  rate  per  year  in  the  Mortally  Ex- 
perience of  the  Company  will  be: 

(I-R)  i^'W 

The  Contingency  Reserve  should,  therefore,  be  made  up  as  follows: 
First.  Contingency  Reserve  on  account  of  assets. 

C  times  the  assets  X  the  mean  fluctuation  rate  of  assets. 
Second.  Contingency  Reserve  account  of  Interest. 

C  times  the  assets  X  interest  rate  X  mean  fluctuation  per  cent  ' 
in  the  interest  rate. 
Third.  Contingency  Beserve  account  of  mortality. 

C  times  (I— R)  jo^"^ 
The  sum  of  the  above  three  will  give  the  Contingency  Reserve  with 
sufficient  accuracy  for  all  practical  purposes. 

Here  C  is  the  constant  which  is  to  fix  the  standard. 

THE  STANDARD  OF  SAFETY. 

The  standard  of  Safety  becomes  detennlned  as  soon  as  we  detmiine 
C    in  the  foregoing  formula  for  the  Contingency  Reserve. 
What  do  we  mean  by  Safety? 
What  is  the  buelnesB  Idea  of  Saf^? 
What  is  the  common  sense  idea  of  Safety? 

.When  we  say  a  Life  Lraurance  Company  is  safe  we  mean  that  its 
Ccmtingency  Reserve  is  so  large  that  thm  is  no  reasonable  ptolialiUlliy 
of  its  being  consumed  by  fluctuations  in  a  few  years  and  b^ore  the  Com- 
pany has  an  opportunity  to  replenish  its  Contingency  Beserve.  That  Is  to 
say,  that  the  Company  is  in  no  danger  of  touching  the  Dead  Line  of  the 
Jjegal  Reserve. 


InTolvecl  in  tbis  conception  of  Safety  are  three  ideas: 
Hist  The  probabilily  or  amount  of  chance. 
Second,  fliat  the  Ckmtingencj  Beserve  will  be  consumed. 
Third.  In  a  giren  time. 

The  abore  is  not  only  the  common-sense  and  business  meaning  of 
Safety,  hnt  it  is  the  strictly  scientific  meaning  and  we  cannot  conceive  of 
Safety  inrcMng  any  more,  or  any  less  conditions. 

TMB  COWraGSKCf  RBSBRVE  TABLE. 

We  give  below  a  table  which  may  be  called  the  Contingency  Beserve 
table: 

THE  CONTINGENCY  RESERVE  TABLE. 
Probability  that  the  Contiiigeiiey  Reamre  will  be  oonsamed. 


No.  of 

1 

Cnumcein 
4 

1 

Chance  in 
10 

1 

Chance  in 
20 

1 

Chance  in 
200 

1 

Chance  in 
8000  . 

1 

.678 

1.28 

1.64 

2.58 

8.06 

6 

1.51 

2.88 

8.70 

5.80 

8.00 

10 

2.12 

4.05 

6.20 

8.14 

18.50 

20 

8.00 

6.78 

7.38 

11.54 

17.78 

From  the  above  Contingency  Besenre  table  we  may  find  the  stand- 
aid  of  Safety  eomiponding  to  any  Oonting^cy  Beserye^  or  the  Conlin- 
gencj  Besenre  correiqponding  to  any  standard  of  Safety. 

At  the  top  of  the  taUe  is  foond  the  probability  or  nnmber  of 
chances.  In  the  coinmn  to  the  extreme  left  is  found  the  time  or  tiie 
number  of  years.  In  the  body  of  the  table  are  fionnd  tiw  anmbers  that 
mnst  be  mnltiplied  by  the  mean  ftnctnation  in  order  to  the  Ckn- 
tingency  Besem  correqioiiding  to  the  standard. 

Thus,  suppose  the  standard  is,  that  there  shall  be  less  than  one 
dance  in  twenty  that  the  Contingency  Beserre  shall  be  consnmed  by 
tnctnations  in  ten  years.  At  ^  top  of  the  table  we  find  cm  duuice 
in  20.  In  the  coinmn  to  the  estrane  left  we  find  10  years.  In  the  body 
of  the  table  we  find  the  emespondii^  nnmbm  5.20.  Thns,  5 JfiO  times 
the  mean  finctnation  will  give  soch  a  Conting^cy  Beserve  that  there 
is  less  than  one  chance  in  20  that  the  Contingency  Beserre  w&l  be  con- 
snmed by  finctuations  in  10  years. 

•4 


If  we  multiply  the  mean  fluctuation  by  2.88  we  see  from  the  table 
that  we  will  obtain  a  Contingency  Reserve  such  that  there  is  less  than 
one  chance  in  10  that  the  Contingency  Beserve  will  be  consumed  by 
finctnations  in  5  years. 

From  the  Ctmtingency  Beserve  table  we  take  the  following: 


Namb«r  of  Tears 

Contingency  Reserve 

1  in  10 

80 

5.73  ftuotuatioiis 

1  in  20 

10 

5  .20  finctnations 

1  in  200 

5 

5.80  fluctuations 

Thus,  the  above  are  differ^t  ways  of  expressing  practically  the 
same  standard  of  Safety,  for  each  equals  the  yearly  finctnations  mnlti- 
plied by  about  five  and  a  half. 

If  the  standard  is  lowered  a  little  we  see  from  tiie  table  that  the 

danger  of  insolvency  very  rapidly  increases.  If  the  standard  is  raised  a 

little  the  safety  is  greatly  increased. 

The  Contingency  Reserve  should  coyer  the  maximwm  finctnation 

that  can  reasonably  be  expected  to  occur. 

Panics  come  at  intervals  of  approximately  10  years.  The  periods 
over  which  mean  fluctuations  are  calculated  should  extend  over  10  or 
20  years,  so  as  to  include  panics  and  to  cover  the  greatest  slumps  that 
are  likely  to  occur  in  market  values. 

Taking  panics  into  account,  5  times  the  mean  yearly  fluctuation 
would  seem  to  be  about  the  correct  Contingency  Reserve.  7  times  the 
mean  yearly  fluctuation  we  see  from  the  table  is  almost  too  much  and  3 
times  not  quite  enough. 

We  may  look  upon  the  periodic  panics  that  occur  about  every  10 
years  as  part  of  the  known  facts  outside  the  Contingency  Reserve. 
Market  values  begin  as  a  rule  soon  after  a  panic  gradually  to  rise,  and 
the  general  trend  is  upward  for  about  10  years  when  there  is  another 
slump.  During  continual  rise  of  values  an  extra  amount  of  Contin- 
gency Reserve  should  be  set  aside. 

CALCULATIOH  OF  THE  COHTINGEirCT  RESERVE. 

By  using  the  foregoing  Contingency  Reserve  table  the  calculation 
of  the  Contingency  Reserve  becomes  simply  a'  question  of  multiplica- 
tion.  We  will  app^  the  method  to  a  few  examples. 

m 


Suppooe  we  take  as  a  standard  that  tlie  Gontini^Nicy  Beaerre  shall 
be  5  times  the  mean  yeari^  toctaatioiL  We  see  from  the  table  that  this 
standaid  may  be  expiessed  in  a  good  many  dUferait  forms.  It  is  nearfy 
equivalent  to  any  oae  of  the  three  foUowingc  Either  one  ehance  in  10 
that  the  €k»ntingaicy  Besme  wHl  be  eonsomed  in  20  years,  or  one 
chanoe  in  20  that  the  Gontingaicy  Bemanre  will  be  consumed  in  10 
years,  or  one  chanee  in  200  ihat  tkb  Ckmtingency  Beserve  wiH  be  con- 
snmed  in  5  years. 

Upon  this  standard  what  shoidd  be  the  Cknitingency  Besenre  <^  a 


Cmnpany  snbject  to  the  f blowing  conditions: 

Insurance  in  fcHce   |2,000,000.000 

Knmher  of  policies   1,000,000 

Aranige  araonnt  of  pcdicy   2,000 

Bc8»Te   000,000,000 

Average  reserve  per  policy   000 

Amoont  at  risk  per  pulk-j   1,400 

Average  square  root  of  mean  square  fluctua- 
tion per  year  in  market  values  of  assets. .  .009 

Interest  rate     .05 

Average  yearly  fluctuation  in  peat  cmt  of  inter- 
est rate   ,03 

The  contingency  reserve  should  be: 
Account  of  Assets — 

5X600.000X.009=  27,000,000 
Account  of  Interest — 

5X000.000X.05X.03=»  4,500,000 
Account  of  Mortality — 

.  5X1.400X^x1/ 1,000.000=  700,000 

Total  Ckmtingency  Beserve,  32,200,000 

In  comparison  with  the  above  large  M  Company  consider  a  young 
small  Company  as  follows: 

Insurance  in  force   $10,000,000 

Number  of  policies   5,000 

Amount  per  policy    2,000 

Beserve  .    400,000 

Beserve  per  policy    80 


Amount  at  risk  per  policy   1,020 

Average  fluctuation  per  year  in  maric^  values 

of  assets   .000 

(nterest  rate     .05 

Average  yearly  fluctuation  in  per  c^t  of  in 

tmrt  rate   .OS 

The  contingency  reserve  should  be: 
Account  of  assets — 

5X400.000X.009=  18.000 
Account  of  intarest — 

5X400.000X.05X.03^  3.000 
Account  of  mortalily — 

lj020X5Xio  X  V  5.000=  67.800 


Total  Oontingency  Beserve,  88.000 


We  note  a  marked  contrast  between  these  two  Companies. 

In  the  large  old  Company  nearly  all  the  fluctuations  are  in  the  as- 
sets. In  the  small  young  Company  nearly  all  the  fluctuations  are  in 
its  mortality  experience. 

It  is  thus  seen  that  the  rule  sometimes  adopted  of  determining  the 
Contingency  Reserve  as  a  mere  percentage  of  the  assets  is  very  crude 
and  unfair  and  is,  in  fact,  no  test  of  Safety. 

In  fact,  as  the  fluctuation  in  mortality  varies  as  the  product  of  the 
amount  at  risk  into  the  square  root  of  the  number  of  policies  in  force 
the  relative  fluctuation  diminishes  very  rapidly  as  the  Company  grows 
larger,  or  if  the  size  of  the  policies  is  diminished  and  their  number  in- 
creased the  aggregate  amount  of  insurance  remaining  the  same. 

The  above  principles  also  control  the  question  of  the  maximum 
risk  on  a  single  life. 

Suppose  a  Company  desires  to  write  a  few  extra  large  policies. 
The  question  is  how  much  extra  Contingency  Reserve  will  these  few 
extra  large  policies  require? 

The  answer  is  given  by  the  following  formulae : 

Let  (A)  represent  the  average  amount  at  risk  (insurance  less  re- 
serve), and  (N)  the  number  of  policies  in  force  before  the  extra  large 
policies  were  written.  Let  (Aj)  equal  the  amount  at  risk  on  the  extra 
large  new  policies  and  (Nj)  their  number. 

<7 


The  old  mean  yearly  fluctuation  is  given  by  the  formula : 
snd  the  new  mean  yearly  fluctuation  is  given  by  the  formula: 

Thus,  suppose  an  Indnstrial  Insorance  Cknnpany  has  on  Hs  books 
50,000  policies  of  f  100  each,  and  it  wiita  to  write  100  extra  policies 
of  150,000  each.  It  has  already  5,000,000  oi  very  ranall  policies  tm  Its 
books  and  wishes  to  write  5,000,000  veiy  large  policies.  The  lliietiia- 
tlons  before  and  after  will  be  as  follows: 

Old  fluctuation  j^l/jlOO)^  (50.000)=   2.230 

New  fluctuation  ^1/(100)*  (50.000 50,000)^100)=  22.605 
Thoa»  If  the  OontlngeBi^  Beserre  is  5  times  the  fluctuation  the 
Gi»ntinfau7  Besme  before  writing  the  new  business  will  be:  • 
Old  Contingency  BeMm.......  11.180 

and  after  will  be: 

Hew  OoitingeBcy  Bes^te  Iia025 

From  the  above  formula  It  Is  very  easy  tor  a  Company  to  U31 
whether,  with  its  present  Contingency  Besorre,  It  can  afford  to  write 
propoiied  new  large  risiks. 

The  probable  fluctuation  Is  such  that  theie  are  as  mai^  fluetna- 
tlons  above  as  below.  That  Is  to  say,  the  chances  are  even  tiiat  the  real 
fioctuation  will  be  abore  or  bdow  the  probaUe  fluetnatkm. 

The  probable  fluctuation  is  given  in  the  flrst  column  of  probabilities 
in  the  Contingency  Reserve  table  for  one  chance  In  four  that  the  Con- 
tingency Reserve  will  be  consumed  by  adyerse  fluctuatl(ms  is  one 
chance  in  two  that  the  fluctuations  plus  or  minus  shall  equal  the  Con- 
tingency Reserve. 

Suppose  a  Company  has  10,000  policies  in  force.  On  an  average 
the  ex[)ected  deaths  will  be  about  one  per  cent.,  or  one  hundred  deaths. 

It  is  an  even  chance  that  the  fluctuations  in  one  year  will  exceed 
ur  fall  short  of  one  hundred  by 

.«T2  il/ 10.000=  6.72 
Thusy  It  Is  an  evm  diance  that  the  deaths  will  fall  betweeen  93  and 
10|  In  iwe  year. 

•  * 

88 


The  expected  deaths  in  10  years  if  the  Company  is  kept  at  the 
same  sise  will  be  10  times  100,  or  1,000.  It  is  an  even  chance  that  in  the 
10  years  the  actual  deaths  shall  exceed  or  fall  short  of  the  expected  by : 

(2.12)    jo^  10.000=  21.10 

Thus,  it  is  an  even  chance  that  in  10  year^  the  deaths  will  fall 
between  978  and  1,022. 

Innumerable  practical  problems  of  a  nature  similar  to  the  above 
may  easily  be  solved  by  the  foregoing  tables  and  equations. 

NATURE  OF  THE  CONTINGENCY  RESERVE. 

The  Contingency  Reserve  is  a  General  Fund.  It  is  designed  to 
maintain  the  integrity  of  the  Company  as  a  whole.  As  a  General  Fund 
it  is  in  ma^ed  contrast  wit^  Special  Funds  which  are  limited  to  par- 
ticular uses  and  clothed  with  Special  Trusts. 

The  Legal  Reserve  is  a  Special  Fund.  It  cannat  be  used  for  gen- 
eral purposes. 

-  Deferred  Dividend  accumulations  are  Special  Funds.  Thcgr  be- 
long to  d^erred  divided  Policyholders  and  should  not  be  used  for  tmj 
oth»  purposes. 

All  profits  accumulated  the  Company  are  Special  Funds  and 
should  be  at  once  assigned  to  their  appropriate  owners  and  not  retnhMd 
by  the  Company  for  general  purposes. 

The  Ccmtingeiicy  Reserve  is  the  only  Oenaral  Fund.  From  the 
Contjyigency  Reserve  the  Company  may  make  a  temporary  loan  to  ma^ 
suffering  cause  in  the  Company  to  cover  unlooked  for  contingaicles, 
the  money  thus  borrowed  fnmi  the  Contingency  Reserve  to  be  repaid  at 
convenience  by  the  cause  to  which  the  loan  was  made. 

HOW  THB  QOmaOSXCT  RESERVE  SHOULD  BE  CRAAXSD, 
USED  AND  RE-DISTRIB0TED. 

.  The  Contingency  Reserve  should  be  considered  a  general  fund  con- 
tributed by  all  the  Policyholders  for  the  maintenance  of  the  integrity 
of  the  Company  as  a  whole  as  against  any  unlooked  for  contingency. 

At  the  beginning  of  the  year  the  Contingency  Reserve  should,  there- 
fore, be  brought  into  existence  and  set  aside  in  admitted  assets  by  an 
entiy  of  the  f omi : 


68 


Expenses  of  G^eneral  Administratioii. 
To  CJontingency  Reserve. 

The  EzpenseB  of  General  Administration  for  the  creation  of  the 
Contingency  Reserve  should  be  treated  like  any  other  expenses  of  G«i- 
eral  Administration  and  should  fall  on  the  Polii^bolderB  like  any  other 
expenses  of  General  Administration. 

The  Gontinfeney  Bcsorre  will  thns  be  set  aside  as  if  it  were  a  lia- 
bility, which,  howerer,  in  fact  it  is  not,  and  will  go  oim  htto  the  next 
year  classed  as  a  liability. 

At  the  bcf^inning  oi  the  nest  year  the  oid  Gmitinfraicy  BeserFe 
should  be  diminated  md  the  new  for  the  year  lnro«i|^  into  existence  by 
the  fidlowing  ^tries: 

Ofmtinfaicy  Besenre  (Old). 

To  Expenses  of  Qeneral  Administration, 
ikpeases  of  General  AAministration. 
To  Comtimgatey  Besore  (New). 

As  long  as  dividends  are  positive  the  Contmgau^  Reserve  will  not 
be  needed.  It  wHl  be  needed,  hoiweftar,  if  dirideads  become  negative. 

If  dividends  become  negative  th^  shoold  be  carried  forward  as 
liabHite,  eaeh  negative  dividend  to  be  eimsidmd  a  liability  against 
its  j^vqper  Policyholder.  Present  native  dividends  are  expected  to  be 
oif-set  and  paid  by  fotmre  positive  dividends. 

In  the  meanthne  the  Contingency  Beserve  is  needed  to  keep  the 
Ocanpony  off  the  Deed  Line  of  the  Legal  Beserve. 

Of  course,  if  dividends  are  permanently  negative  the  Company  is 
insidvent,  in  fact,  no  matter  how  large  its  Contingency  Beserve  may 
now  be^  and  no  matter  how  well  it  may  now  be  able  to  comply  with  the 
technical  Legal  Besorve  laws. 

If  the  dividands  of  some  Policyholders  are  negative  and  of  others 
positive,  this  shows  that  the  premiums  are  not  properly  loaded  and  that 
the  premiums  are  inequitable  as  between  the  diflferent  Policyholders. 

As  dividends  are  the  sums  of  four  quantities,  to-wit :  savings  in  ex- 
pens^  interest,  mortality  and  lapses,  some  of  these  elements  may  be 
positive  and  some  negative.  The  dividend,  as  a  whole,  is  negative  when 
the  sum  of  all  the  parts  is  negative. 


70 


Suppose,  at  the  end  of  any  year,  the  sum  total  of  the  dividends  in 
the  Company  is  negative.  The  Contingency  Reserve  will  necessarily  be- 
come partially  depleted. 

The  best  plan,  however,  is  always  to  carry  forward  the  Contingency 
Reserve  as  a  quasi  liability  for  its  full  standard  amount,  whether  the 
Company  has  enough  good  admitted  assets  to  cover  the  Contingency 
Reserve  or  not.  The  Policyholders  should  be  considered  as  owing  to 
the  Company  enough  to  make  up  the  Contingency  Reserve,  and  the 
Policyholders  should  pay  these  debts  a^  soon  as  possible  out  of  divi- 
dends or  otherwise. 

The  entry  at  the  beginning  of  the  year : 
Expenses  of  Administration. 
To  Contingency  Reserve, 
creates  the  Contingency  Reserve. 

The  calculation  of  dividends  by  the  Legal  method  and  the  carrying 
forward  of  negative  dividends  as  liabilities  constitutes  the  practical  way 
in  which  the  Contingency  Reserve  is  to  be  used  to  cover  fluctuations. 

The  closing  entry  at  the  termination  of  business: 
Contingency  Reserve 

To  Expenses  of  G^eral  Administration, 
re-distributes  the  unused  Conting^ifiy  Besorve  back  to  the  Policyhold- 
ers in  the  legal  proportiims. 


71 


CHAPTER  IV 


DIVIDEKD  CAtCOLATIOirS. 

In  our  opinion  the  question  of  dividend  calculations  has  been  too 
much  regarded  as  a  question  of  expediency  from  the  Company's  side. 
Tims  considered,  no  solution  has  ever  been  reached. 

We  attack  the  question  from  the  Policyholder's  side.  Primarily,  we 
look  upon  the  question  as  a  legal  one.  What  are  the  Policyholder's  legal 
rights? 

The  right  to  dividends  exists  in  the  Policyholders.  The  duty  of  cal- 
culating dividends  by  the  legal  method  rests  upon  the  Company. 
The  law  fixes  the  title  to  all  property. 

The  property  may  be  acquired  by  purchase  or  inheritance.  The 
property  may  be  the  original  property  or  it  may  be  an  off-spring,  product 
or  profit.  The  property  may  be  owned  by  an  individual  or  may  be 
owned  jointly  or  in  common  by  a  number  of  different  parties.  No  matter 
how  acquired  or  created  or  in  what  proportions  owned,  the  title  is  a 
question  of  law  under  the  evidence. 

RESULTIFG  TRUSTS. 

The  fund  out  of  which  dividends  are  to  be  paid  constitutes  a  "Re- 
sulting Trust."  The  fund  grows  or  "Results"  collaterally  out  of  the 
business.  There  is  no  express  contract  creating  the  fund  or  establishing 
the  "Trusts,"  but  these  result  from  actual  conditions. 

In  calculating  premiums  each  Company  makes  pre-suppositions  as 
to  the  future.  The  Company  assumes  an  expense  rate,  an  interest  rate 
and  a  mortality  rate  and  on  these  pre-suppositions  calculates  the  pre- 
miums each  Policyholder  is  to  pay. 

The  Policyholder  pays  his  premiums  upon  the  idea  tliat  the  pre- 
suppositions  are  correct. 

In  fact,  the  pre  suppositions  are  nearly  always  too  severe  against  the 
Policyholder.  Profits  or  savings,  therefore,  "Result"  from  this  feict  and 
these  profits  constitute  the  "Resulting  Trust." 

The  question  of  dividend  distributions  is  the  question  of  determin- 
ing the  amount  of  this  "Resulting  Trust"  and  the  proportions  in  which 

72 


it  is  owned,  and  therefore  the  proportions  in  which  it  is  to  be  divided 
among  the  Poliqrbolders. 

ELEM^ITS  EBTERIHG  IRTO  DmDEHD  CALCDLATIOHa 

The  trust  fund  out  of  which  dividends  are  to  be  paid  "Results" 
partly  from  savings  in  expenses,  partly  from  savings  in  interest,  partly 
from  savings  in  mortality  and  partly  from  savings  in  lapses  and  sur- 
render values.  Each  of  these  four  elements  must  be  considered  in  deter- 
mining the  amount  of  the  fund  and  the  proportions  in  which  it  is  to  be 
assigned  to  the  individual  Policyholders. 

Efforts  have  been  made  to  reduce  dividend  calculations  to  the  con- 
sideration of  "One  Factor"  or  "Two  Factor"  or  "Three  Factor"  methods 
only. 

The  object  of  this  short-cut  would  seem  to  be  a  question  of  e:\M  lu 
calculation  or  a  question  of  expediency  from  the  Company'  side  and  not 
a  question  of  legal  right  from  the  Policyholder's  side. 

Considered  as  a  question  of  legal  right  from  the  Policyholder's  side 
it  seems  self-evident  that  all  four  sources  of  savings  should  be  taken  into 
account. 

The  Law  looks,  however,  only  to  practical  results  and  the  Law  will 
permit  a  "One  Factor"  method  or  "Two  Factor'  method  or  "Three  Fac- 
tor" method,  provided  it  can  be  shown  that  these  short-cuts  produce 
practically  the  same  results  as  would  be  arrived  at  by  detailed  legal 
methods. 

THE  mm  OF  DmDEHD  CALCULATKHIS. 

In  dividend  calculations  the  Company  represents  both  sides.  The 
Company  represents  both  itself  and  the  Policyholder  and  acts  both  as 
Judge  and  as  Jury. 

It  is  questionable  if  a  Company  can  by  any  agreement  with  the 
Policyholder  relieve  itself  of  the  burden  of  calculating  and  paying  divi- 
dends upon  correct  legal  principles. 

Where  a  Policyholder  agrees  in  advance  to  accept  and  ratify  the 
Company's  method  of  Accounting  and  the  Company's  method  of  calcu- 
lating dividends  and  the  Company's  actual  determination  of  the  amount 
due  the  Policyholder  in  dollars  and  cents,  what  is  the  real  fundamental 
meaning  of  this  agreem^t? 

71 


The  meaning  will  dep»id  upon  the  attendant  facta  and  tiie  relations 
of  the  parties  to  each  otiior. 

Has  the  Company  at  the  thme  of  the  contraet  mj  definite  and  de- 
tenninate  meHiod  of  Accounting? 

Does  the  contract  refer  to  this  d^nite  determinate  method? 

Or  does  the  c(mtract  rrfer  to  whatever  method  the  Ckmpany  may 
choose  to  adoft  in  the  fntore 

Does  the  Policyholder  know  what  the  Cmpai^'s  method  of  Ac- 
connting  is? 

Does  the  Policyholder  know  or  nndcarstand  any  method  of  life  In- 
surance Accounting  or  of  dirldeiid  cakulatiims? 
•  Can  the  Policyholder  understand  ai^  method? 

Does  the  Company  loiow  that  the  Policyholder  cannot  understand? 

Can  the  minds  of  two  c<mtracting  parties  meet  on  an  ind^nite  prop- 
oaition,  or  whm  one  ei  them  cannot  understand  the  proposition  and  the 
other  knows  that  he  cannot  uniierstand? 

Is  it  the  purpose  of  the  Policyholder  to  give  the  Company  carte 
blanche  to  calculate  dividends  in  any  manner  it  pleases,  whether  1^1  or 

in^? 

The  cmislderatlon  of  the  above  questions  will,  we  bdieve^  conrince 
any  one  that  tibe  real  meanii^  of  the  contract  is  this: 

The  Policyhidder  creates  the  Company  the  trustee  of  the  Policy- 
holder to  do  the  Accounting  and  to  calculate  divid^ids  according  to 
fundamental  rules  of  law  and  equity. 

It  is  of  the  utmost  importance,  therefore,  that  every  Company 
should  know  the  legal  method  of  dividend  calculations  in  order  to  pro- 
tect itself. 

INCIDENCE  OF  EXPENSES  AND  PROFITS. 

Expenses  may  be  looked  upon  as  negative  profits  and  profits  as  neg- 
ative expenjfes.  The  law  for  tlie  assignment  of  expenses  is  thus  the  same 
as  tlie  law  for  the  assignment  of  profits. 

The  assignment  of  expenses  is  regulated  by  the  same  general  rules 
as  the  tax  laws. 

The  assignment  of  profits  are  these  same  laws  reversed. 

The  same  fundamental  principles  also  underlie  questions  in  Politi- 
cal Economy  as  to  whether  increased  costs  falls  on  the  consumer  or  the 
manufacturer  or  the  carrier  or  upon  whom  the  ultimate  benefit  «.f  any 
(  heap  production  falls. 

14 


There  are  three  distinct  demaits  entering  into  all  these  questions: 
First.  Classifications. 

Sec(md.  The  determination  of  the  proximate  subject  matter. 

Third.  The  ultimate  incidence,  or  the  thing  or  person  ultimate|p 
benefited  or  injured. 

The  Life  Insurance  Company  is  concerned  chiefly  with  the  first  and 
second  of  these  elonents;  to-wit:  classifications  and  the  d^smiination 
of  the  proximate  subject  matter. 

Into  the  third,  or  the  ultimate  remote  consequential  incidence  of  the 
ben^t  or  cost  the  Courts  do  not  go,  nether  is  the  Life  Insurance  Com- 
pany justified  in  attempting  to  go.  These  remote,  contingent  conse- 
quences belong  to  the  most  difficult  portion  of  Political  EJconomy  and  do 
not  constitute  a  part  of  the  practical  administration  of  law  nor  the  prac- 
tical working  of  a  Life  Insurance  Company. 

The  law  charges  each  item  of  expense  and  credits  each  item  of  profit 
directly  against  that  proximate  subject  matter  to  which,  under  the  evi- 
dence, the  expense  or  profit  relates.  The  remote,  contingent  ultimate 
incidence  is  allowed  to  tal^e  care  of  itself. 

The  evidence  may  show  that  the  proximate  subject  matter  is  an  in- 
dividual thing  or  class  or  the  evidence  may  fail  to  point  out  any  proxi- 
mate subject  matter  at  all.  If  the  evidence  fails  to  point  out  any  sub- 
ject matter  the  law  supplies  the  subject  matter;  to-wit:  the  contracts 
simply  as  contracts,  each  measured  by  the  single  premium. 

Though  these  fundamental  principles  may  appear  in  one  sense  sim- 
ple and  elementary,  and  in  another  sense  abstract,  yet  it  is  utterly  im- 
possible without  these  principles  to  arrive  at  the  legal  metliod  of  divi- 
dend calculations,  and  as  this  duty  rests  upon  the  Company  we  feel 
justified  in  urging  attention  to  this  legal  method. 

EXPBiraBS. 

In  classifying  ei^enses  our  first  question  is,  what  are  the  sulqeel 
matters  to  which  the  expenses  relate?  Do  the  expoises  rdate  to  an  in- 
dividual thing  or  to  a  class,  or,  are  we  unable  to  relate  the  expense  to  any 
one  thing  or  elam,  and  if  to  a  class,  in  what  character  is  the  dass  de- 
termined? 

First  Expenses  of  Premium  Collection. 

A.  Commissions  on  first  proniums.  Each  item  of  commission  re- 
lates to  an  individual  premium.  This  individual  j^remium  is  the  proxi- 

n 


mate  subject  matter  against  which  the  law  will  charge  the  commission 
expense. 

Into  the  remote  questions  of  whether  other  Policyholders  are  bene- 
fited or  not,  the  h\w  will  not  go;  unless  it  is  clearly  shown  that  others 
are  benefited  and  how  much  and  that  they  have  received  this  benefit  un- 
der an  implied  contract.  If  all  this  is  shown  the  other  Policyholders 
may  be  charged  as  much  as  they  are  benefited  but  no  more. 

But  this  does  not  vary  the  original  rule.  The  first  year's  commis- 
sion will  still  be  charged  against  the  first  premium  and  must  be  paid  in 
full  out  of  the  first  premium,  no  matter  whether  other  Policyholders 
have  to  pay  for  collateral  benefits  or  not. 

B.  General  expenses  of  premium  collection.  Outside  of  commiis* 
sions  there  are  other  expenses  of  premium  collection  which  the  evidenci: 
will  relate  not  to  any  particular  premium  or  premiums,  but  to  the  class 
of  premiums  as  a  whole.  The  proximate  subject  luatter  here  is  the  cUuM 
of  premiums  as  a  whole. 

The  general  expenses  of  premium  collection  will  be  charged  by  law 
as  an  advalorem  percentage  charge  against  all  premiums  alike. 

The  law  will  not  consider  how  collet-ting  the  premium  of  A  will 
affect  B.  If  B  has  paid  all  his  premiums  he  should  not  be  charged  any- 
thing for  collecting  the  prenMUB  o{  A,  but  A  must  pay  these  expenses 
bimself. 

Under  the  head  of  general  expenses  of  premium  collection  we  may 
include  renewal  commissions,  agency  salaries,  rents  for  agency  pur- 
poses, agency  supervision,  traveling  expenses,  agents'  licenses,  and  all 
other  expenses  connected  with  tbe  agoiey  t^psUm.  AIsd  medical  ex- 
penses and  inspection  of  risks. 

Some  of  these  may  not  strictly  fall  in  the  class  of  general  expenses 
of  premium  collection,  but  as  the  law  looks  only  to  practical  results  and 
as  dividends  are  not  practically  affected  by  this  short  ent,  it  is  permis- 
sible to  make  it. 

Like  the  judgment  of  a  Court,  dividend  calculations  are  based  on 
the  evidence  and  should  not  exceed  nor  fall  short  of  the  evidence.  Thf 
calculation  can  be  no  better  than  the  evidence. 

It  is  probably  true  that  e<Hi]iected  with  eyeiy  premium  collection 
there  is  a  constant  expense,  and  strictly  speaking  the  general  charge  of 
premium  coUecfion  OfBght  to  be  a  eomtant  jdiis  a  pocentage. 


71 


But  the  eTidence  seldom,  and  perhaps  never,  goes  far  enough  for  us  to 
know  what  this  omstant  is.  We  follow  the  evidence,  therefore  (  all  the 
evidence  that  we  can  possibly  obtain),  by  charging  the  general  expenses 
of  premium  collection  as  a  percentage. 

gectmd.  The  Exp^MWS  of  Genial  Administration. 

Outside  the  expwiaes  of  pr^um  collection  there  are  expenses  of  a 
gtiU  more  general  nature  which  the  evidence  wiU  fail  to  relate  to  any 
individual  thing  or  person  or  policy  or  class  more  than  to  any  other. 
These  expenses  may  aptly  be  called  expenses  of  Qen^  Admini^tioii, 

as  already  mentioned. 

In  the  class  of  expenses  of  General  Administratimi  may  be  enumei^ 
ated,  salaries  of  Home  and  Branch  offlcCTs,  r«its  fw  goiaral  purposes, 
furniture  and  fixtures,  general  licenses  to  do  boaineas,  general  Insurance 
taxes,  traveling  expensed  for  genml  purposes;  office  expenses,  such  as 
postage,  telegrams,  express  charges,  messages,  «E^ehanges,  printing  and 
stationery,  Director's  fees,  Stock  Diyidaids,  genaral  legal  eq^enses  aad 
all  other  expenses,  that,  so  far  as  we  know  velate  to  the  Gosipany  as  a 
whole,  and  do  not  particularly  relate  to  one  thing  or  class  more  than  to 
any  oth^. 

What  is  the  fMroximate  subject  matter  to  which  such  expenses  of 
G^eral  Administration  relate? 

Evidently  as  a  matter  of  law  these  exp^ises  must  be  charged, 
not  against  any  particular  individual  or  class,  for  thiy  do  not  rdate  to 
any  particular  individual  or  clifiss;  but  against  all  contracts  in  the  Cgm- 
pany  alike,  according  to  the  value  of  the  contract  sunply  as  a  contract 
The  value  of  the  contract  is  measured  by  the  single  premium,  at  the 
time. 

The  expenses  of  G^eral  Administration  ecmi^tate  the  residiiaiy 
class  into  which  must  be  dumped  all  exp^ises  which  the  evidmee  fails  ta 
relate  to  any  individual  thing  or  class. 

Such  a  residuary  class  must  always  exist,  for  there  will  always  be 
expenses  which  the  evidence  will  fail  to  rdate  to  any  individual  thinf 
or  class.  In  fact,  there  will  be  expenses  which  do  relate  to  all  alike  as 
well  as  expenses,  which  from  lack  of  evidence,  appear  to  rdate  to  all 
alike. 

But  into  this  re^uary  class  of  General  Administration  no  expense 
should  be  placed  until  all  possibility  is  exhausted  of  relating  the  ex- 


77 


p&mt  affiimatiY^  to  its  true  pfoadmate  siib|ect  matter.  The  mi- 
diuiy  elms  is  the  last  resort  after  all  efforts  to  dassify  hare  failed. 

As  a  praetieal  qnestkm,  ttaelot^  QBder  the  evidimee,  what  axe  we 
to  do  with  the  Ehqpcases  of  Gciiaal  AdniaJstratioii? 

If  the  erideiice  were  conqplele  there  would  be  revelled,  no  doubt,  a 
cuBStant  expense  in  eonaeetion  witii  the  handling  of  eadi  policy,  bat  the 
evidenee  is  nei^  snildei^  rriiable  to  determine  what  this  coMtaat 
eipenseis. 

Again,  if  a  life  lasarance  Policy  promised  to  pay  independently 
ef  the  life  GonthigeBcy  it  would  be  irimply  a  bills  payaUe  and  the  valne 
the  ecmtraet  wtmld  be  the  faee  Talne  at  the  P<dicy.  The  face  yalne 
€i  tiie  Policy  is  psev»ted  from  beteg  the  yahie  oi  the  ecmtract  by  the 
Life  Contingency. 

Yet  we  know  that  tke  aetnal  benefit  to  the  insnxed  is  some  fnnetioii 
or  other  of  the  lace  Talne  <rf  the  policj. 

If  we  had  no  knowledge  whaterar  we  woald  be  compiled  by  law 
to  chaxge  the  eipoises  as  m  ad  Tak«em  percentage  charge  against 
steH^  pfcminms. 

Bnt  we  are  not  whoify  withont  knowledge  concerning  the  above  ex- 
penses of  administration.  We  know  that  if  onr  knowledge  were  com- 
plete tke  expenses  woaM  foe  made  np  of  a  constant  pins  a  percentage  of 
the  mngle  proninm  pins  a  fttnetiosi  of  the  Insnrance  in  force,  bnt  onr 
knowledge  does  not  go  far  enongli  to  detomine  this  constant  or  to  de- 
tcxmine  the  function. 

We  follow  snch  endence  as  we  have  and  arriye  at  practically  cor* 
nect  xesnlts,  and  thns  comply  with  all  legal  requirements,  if  we  charge 
the  above  eaq^oises  of  administratkm  as  a  nnif orm  ad  valorm  pereoit* 
age  of  the  single  preminm  plus  the  face  yalne  of  the  policy. 

If  we  take  the  average  age  in  the  Company  to  be  about  45  the  single 
preminm  Whole  Life  Insurance  will  be  about  one-half  the  sum  insured. 

We  may  thus,  as  a  short  cut,  sufficiently  accurate,  add  .50  to  the  in- 
surance in  force  and  diyide  the  aggregate  expenses  of  General  Adminis- 
tration by  this  sum  and  call  the  result  the  Administration  Ratio. 

The  Administration  ratio  thus  defined  is  equal  to  two-thirds  of  the 
expenses  of  General  Administration  divided  by  the  Insurance  in  force. 
If  we  multiply  this  administration  ratio  by  the  insurance  in  force  plus 
the  single  premium  on  any  Policy  we  obtain  the  Policy's  pro  rata  share 

TO 


of  tiie  expenses  of  General  Administration,  no  doubt  with  sufficient  ac- 
curacy for  all  legal  and  practical  purposes. 

If  the  Poli<?y  is  a  Limited-Pay  the  expenses  of  premium  collection 
will  cease  when  premiums  are  all  paid,  but  the  expenses  of  General  Ad- 
ministrati(m  will  continue.  Strictly  the  loadings  should  be  converted 
into  an  annniiy  during  the  life  of  the  Policy  so  as  to  meet  the  expenses 
of  General  Administrati<m.  If,  howeyer,  savings  from  interest  and  mor- 
tality are  ample  to  cover  the  expenses  of  Administration  in  all  future 
year%  voA  if  the* Company  is  thorough  satisfied  of  this,  the  Company 
nuiy  credit  loading  as  fast  as  th^  are  paid.  The  Cmpany,  however, 
shcmld  pursue  a  uniform  rule  in  this. 

Expenses  of  itfti^iing  tile  fonds  are  best  omusdered  in  ccmnectiiMi 

with  int»est.   

The  j^ractical,  ^u^HMHBN  ^®  the  softeiently  legal, 
method  of  handling  ^^ifl^^V'*^^    ^  follows: 

First.  Againirt;  the  ^fHP^s  premium  we  charge  the  first  year's 
commiasion. 

Second.  Against  all  Pentiums  by  uniform  ad  vmloiem  pefeoiti^ 
charge  we  charge  the  goieral  expenses  oi  ptemUsm  cidleetion. 

Third.  Against  the  Insurance  in  f«ce^  j^us  the  premiom  hfy 
unifbrm  ad  yalwnn  percentage  charges  we  charge  the  expenses  ifi  Qen- 
eral  Adminkilanition. 

We  credit  the  pcdicy  with  the  loading. 

The  d^erenee  between  the  aboye  expense  charges  and  the  knidhif 
constitutes  the  diyid^id  fmr  the  year  assignable  to  the  policy. 

INTEREST. 

The  gross  interest  including  rents  of  the  Company  should  be  aseer* 
tained  yearly  and  from  the  same  should  be  deducted  the  expaises  of 
Taking  Care  of  the  Funds.  The  differ^ce  is  the  net  intmst 

Included  in  the  interest  may  be  added  such  profits  or  deducted  wich 
losses  as  in  the  judgment  of  the  Company  ought  tn  be  so  accounted  ftw 
dividend  purposes  for  the  year. 

The  expenses  of  Taking  Care  of  the  Funds  should  include  taxes,  re- 
pairs, traveling  expenses,  foreclosures,  legal  expenses  on  account  of  the 
Funds  and  losses,  etc. 

70 


Tiie  Company  ihoiiM  take  an  awage  ot  a  good  many  yean  so  as  to 
prodiice  vnifannity  and  each  year  should  eakvlate  and  pnt  in  its  State- 
ment tlie  net  aaMNi&t  intmat  allowed  liy  tke  Gompaay  for  the  year  as 
a  basis  of  dirldeiid  dOeBlalioiuL 

The  difideBd  in  ieqpeet  to  any  indivldBal  poliqi  on  aceoont  of  in- 
teratrt;  sayings  is  tiie  Mean  BeMr?e  moltii^ied  laj  the  difference  between 
the  net  intefest  rate  allowed  Isr  the  year  and  the  rate  reqoired  to  main- 
tain tlie  BesOTe  on  the  Poli<7. 

MORTALITY. 

Each  Conii>any  should  ascertain  yearly  the  tabular  net  mortality 
losses  ( Insurance  less  Reserve),  on  each  Policy  and  from  this  should  de- 
duct the  Policy's  pro  rata  share  of  the  actual  losses  for  the  particular 
age,  Policy  year  and  class  of  Policy.  The  result  is  the  dividend  for  the 
year. 

If  the  class  at  the  particular  age,  Policy  year  and  class  of  Policy  is 
too  small  to  obtain  reliable  averages  the  Company  must  resort  to  the 
proper  means  to  determine  these  averages. 

Experience  shows  that  in  general  medical  selection  has  the  effect  the 
first  year  of  reducing  mortality  by  nearly  .50,  the  second  year  .40,  the 
third  year  .30,  the  fourth  year  .20,  and  the  fifth  year  .10.  After  the 
fifth  the  mortality  is  normal. 

Medical  selection,  therefore,  has  two  effects.  A  temporary  effect 
and  a  permanent  effect.  The  temporary  effect  wears  off  in  about  five 
years.  After  five  years  the  permanent  strength  of  the  Policyholder's 
constitution  shows  itself  and  the  mortality  savings  thereafter  will  be 
more  nearly  a  uniform  percentage. 

The  best  way  to  determine  mortality  savings  is,  therefore,  to  de- 
termine the  savings  after  the  fifth  year  and  for  the  first,  second,  third, 
fourth  and  fifth  years  to  add  .50,  .40,  .30,  .20,  and  .10,  or  .40,  .30,  .20,  JO 
and  .00. 

The  above  is  the  general  experience  of  nearly  all  Companies  and 
will  produce  better  results  tlian  tlie  Company's  own  experience  unless 
the  Company  is  a  very  large  one. 

If,  in  calculating  dividends  the  Company  classifies  its  mortality 
riaks  geographically  ast  1^  oeei^tiana  or  by  character  of  riaka  or 


otherwise,  the  Company  should  so  specify  in  its  Statement  and  should 
assign  to  each  class  the  savings  in  that  class  according  to  the  foregoing 
rules. 

LAPSES  ASD  SURHETOiaUS. 

The  Company  should  calculate  yearly  the  lapse  and  surr^ider  rates 

for  different  ages.  Policy  years  and  classes  of  Policy. 

The  dividends  assignable  to  any  Policy  for  the  year  on  account  of 
lapses  and  surrenders  should  be  determined  as  follows : 

The  actual  lapse  and  surrender  rate  of  the  Company  at  the  particu- 
lar age,  policy  year  and  class  of  policy  should  be  multiplied  by  the  per- 
centage of  Reserves  saved  by  the  Company  at  the  particular  age.  Policy 
year  and  class  of  Insurance,  and  the  result  multiplied  by  the  Reserve  on 
the  Policy  should  be  the  dividend  assignable  to  the  Policy. 

If  the  class  at  the  particular  age.  Policy  year  and  class  of  Policy  is 
too  small  to  obtain  reliable  averages  the  lapse  and  surrender  rates  may 
be  taken  to  be  the  experience  of  Companies  generally;  to-wit:  in  the  fol- 
lowing proportions: 

.20  the  first  year;  .12  the  second;  .08  the  third;  .05  the  fourth,  down 
to  nothing  the  twentieth  Policy  year.  Otherwise  the  Company  may 
average  the  results  of  a  good  many  years. 


MEDICAL  SELECTION  LAPSES  Ain>  SURRENDERS. 


We  ghre  bdow  wluit  may  be  called  Hie  ayimge  myings  rate«  from 
tlie  tempofaiy  cffeet  <tf  Medical  a^eetioii,  from  lapses  and  ammiden, 
and  tlie  average  par  cmt  oi  Besmea  aayed  on  nm&adm. 


Policy 
Tear. 

Average 
Savings  from 
Medical 
Beieetioa.  ' 

Average 
Smreoder 

Average  per 
cent,  of  Sur- 
rmdered  Re- 
wme  Bared. 

Average  per 
cent,  of  Exist- 
insReserve 
Mived. 

1 

.50 

.20 

.20 

.040 

3 

.40 

.12 

.19 

.023 

8 

.80 

.08 

.18 

.014 

4 

.80 

.05 

.17 

.008 

5 

.10 

.04 

.16 

.006 

6 

.036 

.16 

.006 

7 

.032 

.14 

.006 

8 

.088 

.18 

.004 

9 

.024 

.12 

.003 

10 

.020 

.10 

.002 

11 

.016 

.08 

.002 

18 

.018 

00 

.001 

18 

.008 

.04 

14 

.004 

.02 

15 

.000 

.00 

LEGAL  CLASSmCATIOKS. 

Perfect  exactitude  in  classifying  the  facts  is  not  possible  and  is 
not  expected  in  Life  Insurance  or  any  other  business. 

All  that  is  necessary  is  that  the  classifications  be  sufficient  to  com- 
ply with  1^1  reqninonaits  ao  as  to  protect  the  Company  in  tJie  dia- 
charge  of  its  duty. 

As  a  matter  of  fact  slight  inaccuracies  in  daasificatiknui  will  pro- 
duce no  appreciable  difference  in  dividends. 

We  think  it  may  be  safely  relied  upon  that  if  a  Company  declares 
dlTidends  as  herein  laid  down  it  is  within  the  law.  Bnt  ai^  material  de- 
parlBie  will  be  illegaL 


FORMULA  FOR  DIVIDEHD  CALCUI^ATIOIIS. 


We  bring  together  here  in  one  place  the  lomula  for  dividend  cal- 
culations by  the  legal  method. 


First  premium  multiplied  by  commission  rate   

Premium   multiplied  by   general  premium 

charge   • 

(Insurance  in  force  plus  single  premium) 

multiplied    by    general  administration 

ratio  

Sum  of  the  above  three  expenses  

That  part  of  the  Load  on  the  Policy  allowed 

for  the  year  ,  

The  difference  is  the  savings  from  expenses  

iNTBBBSr. 

Beserve  multiplied  by  intereet.  aitT&igs  gives 

the  savings  on  acconnt  of  intmst  

Mortality. 

Amount  at  risk,  multiplied  by  expected  death 
rate,  multiplied  by  savings  rate,  gives 
the  savings  from  mcHrtalitgr     

SUSSBNDIBS. 

Beserve  multiplied  by  the  Surrender  rate, 
multiplied  by  the  savings  rate,  is  the  sav- 
ings from  surrenders  

The  sum  of  the  above  savings  from  expenses,  fmn  intereat,  from 
mortality  and  surr^ders  constitutes  the  total  dividend. 

APPLICATIOHa 

To  apply  this  formula  in  actual  practice  we  will  suppose  that  the 
fundamaital  ratios  of  the  Company  are  as  follows: 

Gomntissimis  the  first  year  50 

Q^Mffal  i^Pemium  charge   10 


Administration  ratio,  or  expenses  of  Admin- 
istration divided  by  Insurance  in  force 


plus  Single  Premiums    1.75 

Net  interest  rate  realized   045 

Interest  required  to  nmintain  the  Reserve..  .68 

Mortality  sayings  after  the  fifth  year  10  » 


Lapse  ratio  and  surrender  ratio  the  standard  as  given  above. 
What  dividends  will  be  earned  by  a  Twenty-Pay  Life  Policy  for 
flyOOO  issued  at  age  35  at  a  premium  of  |S&34  on  a  3  per  cent  basis? 


The  pure  premium  will  be  ^29.85. 
We  give  the  calcnlatkms  below : 

First  Year. 

Expense — 

Commission  First  Premium  .50  of  38.34   19.17 

General  Premium  Charge  .10  of  38.34   3.83 

General    Administration    ratio    1.75  X  (Insurance 

+  Single  Premium)   2.50 


Total  charges   $25.50 

Load.  (The  Load  should  be  converted  into  a  Life 
Annuity  unless  savings  fnmi  interest  and  mor- 
tality are  enough  to  cover  future  expenses.)....  $8.49 

Loss  from  the  Expenses  Account   — 17.01 

Interest — 

Menu  Reserve  X  ( .015)=Savings  from  interest   .39 

Mortality — 

Amount  of  Insurance   $1,000 

Reserve  .    26 

At  risk  (Immranee  km  Beserve)   974 

Tabular  If  mrtality  rate   8.94 

Expeeted  lom'   &70 

.10  £xpeeted  lo»F=8aTings  from  mortality   .87 

M  8«Ti]igii  doe  to  Medical  selection    4.85 

•  Lttpaes  mid  BmreiideFB — 

Terminal  BetwrveX(.04)   .88 

There  is  thus  the  first  year  a  loss   — 10.52 

S4 


Second  Yeas. 

Expense  ni^^^^^fc 

.10  of  Premium   ^^^^^PHUBP 

General  Administration  as  before   2.50 

Total  expenses   •   ^-^^ 

Load   8.49 

Savings  on  account  of  expenses   2.16 

Interest — 

Mean  Reserve  $49X  (.015)=Savings     ^  .78 

Mortalitjf — 

Insurance  in  force   1,000 

Besenre    ^ 

At  ridk   951 

Death  rate   9.08 

Expected  Mortality  loss   8.63 

.10  Expected  mortality=iBaving«  from  mortality   .86 

.40  Savings  dne  to  Medical  adection   3.44 

Lapses  and  Surrenders — 

ReserveX(.023)    ' 

Total  dividend  second  year    8.27 

In  exactly  the  same  way  the  other  Dividends  are  calculated. 
Consider,  for  instance,  the  twenty-fifth  policy  year,  after  praniums 
are  all  paid.  There  will  be  no  charge  for  Premium  Collection,  but  the 
charge  for  General  Administration  will  continue.  There  will  here  be 
no  Load  to  be  credited.  The  calculations  will  stand,  therefore,  as  follows: 
Interest — 

Keserve  666X  (.015)=    9-99 

Mortality — 

Insurance   1,000 

Beserve   *   666 

At  risk   333 

Tabular  mortality   -040 

Expected  loss   13.32 

.10  Sayings  

Total   11.82 

85 


Empense — 

Deduct  Administratioii  cliarges   2.50 

Total  IKrideBd  tw^ty-fifth  year   a82 

Tkw»,  on  a  Twenly-Pay  Life  Policy  for  1,000,  age  35 :  Premium,  38.34 ; 
Pure,  29.85;  Load,  8.49,  the  final  result  will  stand  thus : 


Poliegr  Ymmn     1        2       5      10     16     80     80  40 


Expense ._  

Commission — Special. . . 

Interest  

Mortality   . 

Medical  —  Selection 

2.16 
—19.17 
.39 
.87 

4.35 
.88 

2.16 

2.16 

2.16 

2.16 

2.16 

—2.60 

—2.80 

.78 
.86 

8.44 
1.08 

1.80 
.86 

.86 
.72 

3.84 
.82 

6.24 
.80 

9.06 
.73 

10.84 
1.10 

12.36 
1.85 

LftpM  and  Sonrsndtr... 

TotallHfldMid  

—10.58 

8.87 

6.40 

6.88 

9.20 

11.96 

9.44 

11.51 

and  proportionally  for  intervening  years. 

The  dividends  the  first  five  years  will  be  as  follows: 


First  year  a  loss   | — 10.52 

Second  year  Dividend  .........  ^   8.27 

Third  year  Dividend   7.72 

Fourth  year  Dividend   7.06 

Fifth  year  Dividend   6.40 


Total  Dividends  $  18.93 

Average  Annual  Dividend   3.78 


The  Company  will  sustain  a  loss  of  |10.52  the  first  year.  The  second 
year  the  dividend  will  be  |8.27,  and  dividends  will  diminish  until  the 
fifth  year.  If  we  were  to  smooth  these  dividends  into  uniform  payments 
they  would  amount  to  about  |3.78  per  annum.  But  these,  of  course,  do 
not  represent  the  Dividends  as  actually  earned. 

The  savings  on  interest  and  mortality  are  here  so  great  that  after  the 
premium-paying  period  the  dividends  on  this  policy  will  be  more  than 
sufficient  to  pay  the  yearly  expenses  of  General  Administration.  If  this 
were  not  true  the  loading  should  be  converted  into  Annuity  credits  dur- 
ing the  entire  existence  of  the  policy.  Instead  of  crediting  the  entire  load 
(2.16)  annually  for  twenty  years,  we  would  credit  |1.52  annually  during 
the  life  of  the  Policyholder. 

No  Company  should  declare  dividends  before  they  are  earned. 

86 


In  the  long  run  it  would  be  better  for  the  Company  and  also  for  the 
Policyholder  if  no  dividends  were  declared  until  the  end  of  the  fifth  year. 

Thereafter  dividends  run  smoothly  and  might  be  paid  annually  or 
otherwise,  according  to  contract. 

Tontine  deferred  dividends  are  very  desirable.  This  is  an  excellent 
form  of  contract,  both  for  the  Company  and  for  the  Policyholder,  pro- 
vided dividends  are  calculated  by  the  Legal  method. 

THE  AG6U6ATB  DmSSBiX  SDSFLUS. 

By  the  foiegiring  methods  the  Company  should  asc«tain  the  propor 

tioBS  in  respect  to  which  the  respective  policies  shall  share  in  the  ags^^ 

gate  divisible  surplus  for  the  year.  The  aggregate  divisible  surplus  should 

be  ascertained  as  follows : 

The  Company  should  first  set  aside  aiongh  to  satisfy  its  liabilities  as 

follows : 

The  Reserves  by  the  Interest  and  Mortality  tables  used  in  ealcnlatii^ 
^^^inms  upon  insurance  and  endowments  in  force  in  the  Company,  and 
the  net  present  value  of  all  Annuity  policies  less  the  risks  of  this  Com- 
pany re-insured  in  oiher  solvait  Companies,  Beserves  to  i^vide  for 
Health  and  Accidait  benefits,  the  present  values  of  all  amounts  not  yet 
due  on  Bnpplanentaiy  Contracts,  amounts  due  mi  surrendered  and  lapsed 
policies,  death  losses  unpaid,  matured  endowm^ts  unpaid,  claims  resisted 
by  tiie  Company,  unpaid  Annuity  claims,  unpaid  Suppkmoitaiy  Con- 
tracts, prraniums  paid  in  advance,  unearned  interest  and  nmts  pnid  in 
advance,  commisslims  eanied  and  unpaid,  salairies,  rents,  office  ezpeaaea, 
medical  examiners'  fee%  legal  fees,  taxes,  licenses,  stock  dividends,  due  or 
accrued,  and  all  savings  accumulated  and  undistributed  held  on  aeeonnt 
of  annual  or  defeirred  dividend  whether  declared  or  not,  and  Special  re- 
serves  held  for  i^pecial  purposes  upon  which  the  Company  is  liable  and 
all  other  liabilities  of  all  sorts. 

In  addition  to  the  liabilities  of  the  Company  as  enumerated  above, 
the  CcMnpany  should  set  aside  the  Contingency  Reserve,  to  meet  unlocked 
for  fluctuations  and  contingencies,  including  the  Capital  Stock  and  Sur- 
plus accumulated  by  the  Stockholders  of  the  Company. 

The  balance  of  the  Assets  of  the  Company  constitutes  the  aggregate 
divisible  surplus  for  the  year.   This  aggregate  divisible  surplus  for  th«» 

87 


year  should  be  paid  or  credited  to  the  respective  policies  or  classes  of  pol- 
icies in  tlie  Oompaiiy  sabstantialiy  in  tbe  pn^itions  determined  above. 

PRACTICAL  MBTBODS  OF  DIVIDMRD  CALCDLAHOHS. 

Having  determined  the  fundamental  ratios  for  the  year,  divid^ds 
should  be  calculated  ftnr  each  kind  of  policy  tor  afes  290,  25,  30, 35,  40, 46, 
50,  55, 60,  for  poli^  years  at  intervals  of  five  yean  and  interpolated  be* 
twe»i. 

This  work  is  meehanical  and  simple  and  can  be  dime  in  a  yeaey  abort 

As  the  averages  of  a  good  many  years  shonld  be  taken  for  the  pur- 
pose of  nnM^mniiy  the  fondnnental  ratios  alid  therdSm.  the  dividends 
irQl  change  veiy  little  from  year  to  year. 

If  the  som  of  the  dividends  thus  calculated  does  not  exactly  agree 
with  the  aggregate  divislUe  snrf^ns  the  dividends  riMMild  be  p«^rti<m- 
ally  increased  wdimhrished. 


CHAPTER  V. 


STATEMENTS. 

The  Statements  of  a  Life  Insurance  Company  ought  to  bring  to- 
gether in  systematic  order  the  entire  business  of  the  Company  so  classi- 
fied and  arranged  that  the  rights  of  the  individual  parties  interested  in 
the  business  may  clearly  and  easily  be  ascertained.  Thus,  the  dividends 
due  eacli  PoUcyholder  ought  to  be  calculable  directly  from  the  State- 
ment. 

If  the  books  have  been  kept  according  to  the  method  laid  down  in 
the  foregoing  pages  the  Statement  will  be  little  less  than  transcripts  from 
the  books. 

We  seek  to  give  here  the  form  of  the  Annual  Statement  that  should 
be  made  by  each  Company  to  the  Insurance  Departments  for  the  informa- 
tion of  Policyholders  and  the  Public,  complying  with  the  above  conditions. 

After  the  Statement  we  give  explanations  as  to  the  easiest  way  to 
prepare  the  Statement  and  the  Gain  and  Loss  Exhibit  attached  to  the 
Statement. 

The  Gain  and  Loss  Exhibit  in  effect  is  merely  a  portion  of  the  State- 
ment rewangfed  in  a  different  way,  presenting  the  facts  in  a  different 
light 

Everything  that  is  material  should  be  in  the  Statement  itself. 


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HOW  TO  MAKE  OUT  THE  STATEMENTS.. 

I^rst.  AiNsets  at  the  beginning  of  the  period. 

These  should  be  taken  from  the  last  Statement 

For  the  new  Statment  we  do  not  need  the  ncm-ledger  assets  from 
the  last  Statement,  bnt  th^  are  put  here  simply  for  comparison,  and 
clearness. 

Second.  Additions  to  assets. 

The  facts  and  classifications  are  given  immediately  in  the  Journals 

and  Ledgers.  » 

In  the  Ledger  and  as  far  as  possible  in  the  Jourdal  should  be  kept 

separate  accounts,  pages,  columns  or  divisions  with  the  sub-divisions  of 
premiums,  interest,  sources  of  profit  and  all  other  classifications  named 
in  the  Statement.  Of  course  this  does  not  include  the  modes  of  payment 
along  the  top  of  the  various  diagrams. 

From  the  Ledger  the  total  columns  should  be  filled  in  and  the  analysif 
as  to  how  payments  were  made  should  be  taken  from  the  Journals. 

In  filling  out  the  schedule  of  premiums  the  amounts  paid  in  divi- 
dends, commissions,  cash,  notes  and  liens  and  surrender  values  will  be 
taken  from  the  Premium  Journal  and  the  totals  from  the  Ledger  and  the 
.sundries  column  will  be  used  to  balance.  Similarly  with  other  such  sched- 
ules. 

Third.   Deductions  from  assets. 

Here,  also,  the  totals  should  be  first  taken  from  the  Ledger. 

The  analysis  of  tlie  payments  to  Policyholders  will  be  taken  from  the 
Insurance  Terminated  Journal  or  Ledger. 

The  schedule  of  premiums  and  the  schedule  of  payment?  to  Policy- 
holders may  be  checked  against  each  other. 

Thus,  premiums  that  are  paid  by  dividends  in  the  premium  exhibit 
will  also  appear  in  the  payments  to  Policyholders  exhibit  as  dividends 
used  to  pay  premiums,  etc. 

In  the  exhibit  of  payments  to  Policyholders  we  note  supplementary 
contracts  appear  in  the  schedule  to  the  left  and  also  in  the  list  of  how 
paid  at  the  top  of  the  schedule. 

This  is  evidently  necessary,  as  the  following  instance  will  show : 

Suppose  the  proceeds  of  a  death  claim  used  to  purchase  a  life  an- 
nuity on  the  beneficiary.  It  must  be  entered  opposite  death  claims  under 
suppl^entacy  contracts. 

96 


When  now  these  yearly  annuities  are  paid  to  the  beneficiary  in  cash 
they  must  be  entered  opposite  supplementary  contracts  and  under  cash. 
Fourth.  Assets. 

If  to  the  Ledger  assets  at  the  banning  of  the  period  we  add  the  ad- 
ditions and  subtract  the  deductions  we  should  obtain  the  assets  at  the  end 
of  the  period. 

The  easiest  way  to  check  the  work  and  to  secure  a  balance  is  to  use 
the  trial  balances  at  the  beginning  of  the  period  and  at  the  end  of  the 
period. 

At  the  beginning  of  the  period,  which  should  be  the  beginning  of  the 
year,  the  trial  balance  should  consist  of  nothing  but  assets  on  the  left  and 
liabilities  on  the  right 

Reserves. 

Assets  at  the  beginning :  -  Liabilities. 

Surplus. 

Daring  the  progrew  of  the  business  the  assets  will  be  increased  as 
follows: 

Premiums. 
Interest. 

Profit  on  sales  and  maturities. 
Profit  from  changes  in  book  values. 
^  Increase  in  liabilities. 
During  the  progress  of  the  business  the  assets  will  be  diminlirfwd  as 
follows: 
Death  claims. 
Matured  endowments. 
Annuities. 
Dividends. 
Surrender  values. 
Expenses. 

Losses  on  sales  and  maturities, 
liosses  in  book  values. 
Decrease  in  liabilities. 

If  we  take  the  trial  balance  at  the  end  of  the  year  and  analyse  it 
according  to  the  above  aekeme  and  put  in  one  place  the  increase  in  assets 
and  in  anoth^  place  the  decrease  in  assets  and  in  another  the  asac^  at 


Increase  in  Assets: 


Dimunition  of  Assets. 


the  «id  of  the  period  and  at  another  the  liabilities  at  the  end  of  liie  period 
and  compare  the  aflsets  and  liahilitiea  at  ti^  ead  with  the  aaaeto  and  lia- 
bilities at  the  beginning,  we  ray  eaaity  «^e  a  balance  by  emnpariaoii 
with  the  trial  balances  a*  tiie  beginning  and  at  the  end. 
Fifth.  Liabilities. 

Just  as  the  ateets  are  divided  into  Ledger  assets  and  Ncm-Ledg»  as- 
sets the  Liabilities  may  conyeniently  be  diirided'in  the  same  wy. 

Sixth.   Contingency  Besocre. 

The  standard  pf  safety  adopted  by  the  Ck>mpany  and  the  amount  of 
Contingency  Reserve  on  account  of  amets  and  om  acconnt  of  BMHFtalKy 
respectively  should  be  given  in  the  Statemoit.  ^ 

Seventh.  Fluctuations. 

The  fluctuation  rates  are  necessary  for  the  propar  determination  of 

the  Contingency  Reserve. 

Eighth.  Exhibit  of  Policies. 

The  exhibit  of  policies  is  not  strictly  necessary  for  the  purposes  of 
Accounting,  but  of  course  is  of  very  great  intoest  and  is  in  fact  the  baals 

of  the  whole  business. 

Ninth.  Classification  of  Assets. 

This  is  another  way  of  exhibiting  how  the  a«3ets  grow  frwn  their 
original  state  at  the  beginning  to  their  final  state  at  the  end  of  the  period. 
It  is  not  strictly  a  part  of  the  Accounting,  but  is  an  interesting  and  nsefol 
achibit. 

The  foregoing  exhibits  give  the  Statement  proper  of  the  Company. 
The  Gain  and  Loss  Exhibit  exhibits  the  same  facts  nnder  diff^nt  ar- 
i-angements  and  in  different  lights. 

GAm  AND  LOSS  EXHIBIT. 

First.  Expenses. 

The  Gain  or  Loss  from  ^qttfises  is  the  gain  or  loss  from  the  loading. 
The  loadings  are  intended  to  pay  expenses. 

In  the  StateBMmt  the  loadings  are  included  in  the  premium  receipts 

on  the  credit  side. 

In  the  Statmait  the  expenses  of  Premium  Collection  and  expenses 
of  Q^ieral  Administration  appear  on  the  debit  side.  The  difiference  be- 
tween the  loadings  and  these  expenses  constitutes  the  aggr^ate  dividend 
from  the  Expense  Account 


But  this  aggregate  expense  saving  is  in  itself  of  little  value.  The  in- 
dividual expense  ratios  are  the  things  that  are  of  importance. 

The  Oain  and  Loss  Exhibit  should  show  as  is  indicated  the  commis- 
sion rates  on  first  and  renewal  prmiums  and  the  ad  valorem  percentage 
charge  per  premium  for  the  general  expenses  of  pr^inm  collection  and 
and  also  the  g^^ral  administration  ratio  for  expenses  of  General  Admin- 
istration. 

It  will  be  remembered  that  only  future  net  or  pure  uncollected  and 
deferred  premiums  are  admitted  Assets  (the  Legal  Reserve  liability  in 
foct  assuming  that  these  premiums  have  been  paid).  But  unpaid  loadings 
are  not  admitted  assets,  nw  are  expaises  paid  in  advance. 

Second.  Interest 

The  intmst  payments  induding  r^ts  and  profits  appear  in  the 
Btatement  on  the  credit  sidci, 

Apparently  in  the  Statement  there  is  no  corresponding  charge  against 
the  intent  by  which  the  profit  and  loss  is  to  be  asc^tained. 

But  the  intmst  charge  is  merged  in  and  disguised  in  the  Legal  Re- 
serve liability.  The  Legal  Reserve  liability  is  in  ftict  a  charge  covering  ex- 
pected interest  and  e^qvected  mortality. 

Thus,  the  real  basis  of  profit  or  loss  is  the  actual  interest  earned  com- 
pared with  the  interest  charged  in  the  Legal  Besme. 

Thus,  tiie  diffof^ce  betwe^  the  net  interest  actually  earned  hy  the 
Company  and  the  interest  required  to  maintain  the  Reserve  constitutes 
the  aggr^ate  profit  or  loss  from  interest 

This  aggr^te  interest  profit  or  loss  must  be  individnaliaed  and  ap- 
portioned to  the  individual  policyholders  as  a  basis  of  Dividend  calcula- 
tions. The  obvious  method  is  to  average  tlie  n^  interest  earnings  o?er  a 
suffici^t  number  of  years  to  obtain  uniformity.  The  diif^^ce  between  Ihe 
rate  allowed,  for  the  year  and  the  rate  to  maintain  the  Beser?e  is  the  pniftt 
or  loss  rate,  which  multiplied  by  the  Policyholder's  Reserve  gives  his 
profit  or  loss. 

Third.  Mortaliiy  Account 

In  the  Statement  the  actual  death  losses,  matured  endowments,  an- 
nuity payments,  etc.,  appear  on  the  debit  side. 

As  in  the  case  of  int^^st,  so  in  the  case  of  mortality,  theate  is  appar- 
ently no  corresponding  charge  on  the  liabilily  side  by  comparison  with 
which  to  determine  gain  or  loss. 

n 


But  as  in  the  case  of  interest,  so  in  the  ease  of  mortality,  this  liabil- 
ity is  merged  in  and  disguised  in  the  JjtgBl  Ses^ve  liability.  The  Legal 
Reserve  liability  includes  liabUity  fbr  expected  mortality  according  to 

the  table. 

Thus,  the  difference  between  the  actual  and  expected  net  mortality 
losses  constitutes  the  aggregate  savings  frwn  mortality. 

These  must  be  individualiaed  for  different  policy  years  and  if  we 
wish,  for  different  ages  and  kinds  of  insurance  as  a  basis  for  Ditideod 

calculations. 

Fourth.  Surrender  Account. 

In  the  Statement  will  be  shown  on  the  debit  side  the  »urrwider  val- 
ues allowed  to  Policyholders  who  lapse  or  surrender. 

Just  as  in  the  case  of  interest  and  mortality,  so  in  the  case  of  sur- 
render values,  the  corresponding  liability  with  which  actual  surrender 
pay  ments  are  to  be  compared  is  merged  in  and  disguised  in  the  Legal  Be- 
sen  e.  The  Company  is  charged  the  amount  of  the  Legal  Reserve  and 
settles  this  liability  for,  in  most  cases,  a  smaller  surrender  value. 

Thus,  the  aifterence  between  the  Keserve  liabilities  and  the  surrender 
values  gives  the  gain  or  loss  from  surrenders. 

We  need  also  to  individualize  these  savings  to  show  how  much  is  as- 
signable to  policies  in  the  first,  second  and  third  policy  years,  etc.,  and  if 
we  wish  for  different  ages  and  kinds  of  policies  as  a  basis  of  Dividend 
calculations. 


100 


CHAPTER  VI. 


EXAMINATIONS  AND  VALUATIONS. 

Examinations  and  Valuations  should  be  looked  upon  as  part  of  the 
Accounting  of  the  Company  to  the  Stockholders  and  Policyholders  and 
should  have  two  objects : 

1st.  Solvency,  to  see  whether  the  Company  can  carry  out  its  con- 
tracts at  all. 

2d.  Dividends,  to  see  what  profits  have  arisen  or  are  likely  to  ari.se. 

NET  VALUATIONS  AND  LEGAL  RESERVES. 

There  are  two  ways  in  which  the  Legal  Reserve  Net  Valuation  laws 
may  be  looked  upon : 

Ist  As  a  substitute  for  all  Life  Insurance  Accounting. 

2d.  As  conditions  with  which  Life  Insurance  Accounting  must  con- 
form. 

The  marked  tendency  has  been  to  look  upon  the  Legal  Reserve  Net 
Valuation  laws  as  substitutes  for  all  Life  Insurance  Accounting. 

In  our  opinion  incalculable  injury  has  been  done  the  cause  of  Insu- 
rance by  what  seems  to  us  this  false  construction  of  the  Legal  Re.serve 
laws. 

Let  us  see  exactly  what  Net  Valuation  is;  what  it  covers  and  what 
it  does  not  cover. 

The  typical  statute  passed  by  nearly  all  the,  states  establishing  the 
Legal  Reserve  is  about  as  follows : 

"The  net  value  of  a  policy  at  any  time  shall  be  taken  to  be  the  single 
net  premium  which  will  at  that  time  effect  the  insurance,  less  the  value 
at  that  time  of  the  future  net  premiums  called  for  by  the  table  of  mortal- 
ity and  rate  of  interest  designated." 

Here  the  policy  discounted  by  mortality  and  interest  is  charged  as  a 
liability  against  the  Company. 

Here  also  the  Company  is  credited  the  present  value  of  future  net 
premiums.  This  in  effect  allows  future  net  premiums  as  admitted  assets. 

101 


But  the  loading  on  the  premiums,  whieh  OH  the  ayerage  is  about  25 
per  cent,  is  not  included  in  Net  Valuations. 

Thus,  though  the  Company  is  charged  substantially  the  full  valne  of 
the  policy  it  is  allowed  credit  for  only  about  75  per  cent  of  the  premiums. 

As  Net  Valuation  takes  no  account  of  future  loadings,  so  of  necessity 
it  takes  no  account  of  those  liabilities  that  are  expected  to  be  paid  out 
of  future  loadings  and  this  is  the  vital  defect  in  Net  Valuations  considered 
i's  a  substitute  for  all  Accounting.  It  leaves  out  a  large  part  of  the  as- 
sets and  a  large  part  of  the  liabilities.  It  is  thus  only  about  one-half  the 
Accounting. 

Let  us  note  some  of  the  things  omitted. 

A  Company  grants  a  large  territory  to  a  General  Agent.  The  Agent 
bpends  large  sums  or  money  developing  the  territory  and  establishing  an 
Agency  Force.  This  benefits  the  Company  as  much  as  if  the  Company 
had  spent  the  money  itself.  In  return  the  (^)mpany  grants  renewal  com- 
missions on  future  premiums.  Under  the  present  Net  Valuation  system 
none  of  these  things  enter  into  the  Accounting  or  into  the  Statement  of 
the  Company,  although  materially  affecting  future  dividends. 

Again,  in  return  for  services  rendered  a  Company  grants  special  or 
board  "contracts  creating  future  contingent  charges  agaiu.^t  the  future 
business  of  the  Company.  These  contracts  materially  affect  future  divi- 
d^ds  and  yet  none  of  these  transactions  appear  in  the  Company's  Ac- 
eoonting  or  in  the  Company's  Statements. 

Again,  a  financing  Company  advances  money  to  put  a  young  Com- 
pany on  its  feet,  and  takes  in  effect  liens  on  future  loadings.  These  liens, 
of  course,  diminish  future  dividends,  but  these  transactions  do  not  appear 
in  the  Accounting  or  in  the  Statements. 

These  and  other  similar  omissions  necessarily  follow  from  the  Net 
Valuation  plan,  for  if  the  assets  out  of  which  all  these  things  are  ex- 
pected  to  be  paid  are  omitted,  to-wit :  future  loadings,  of  course  the  lia- 
bilities themselves  must  be  omitted.  The  Net  Valuation  plan  does  not  pro- 
pose to  take  account  either  of  the^^ie  assets  or  liabilities. 

Again,  in  passing  judgment  upon  the  expenses,  interest,  mortality 
and  snrrender  values  erf  a  Company,  Accounting  requires  that  we  take 
accoimt  of  the  age^  rise  and  rate  of  growth  of  the  Company,  for  under 
equally  good  manacoiient  these  vary  greatly  with  the  age,  size  and  rate  of 


102 


erowth  of  the  Company.  The  expose  ratios  diminish  as  the  Company 
increases  in  size. 

The  following  table  shows  the  average  graduated  expense  ratios  of 
Ckwapaniwi  of  different  riies; 


AVERAGE  GRADUATED  EXPENSE  RATES  OF  LIFE  INSUR- 
MMOm  CXnCPANIES  CLASSIFIED  BY  SIZES 
OF  THE  COMPANIES. 


Size  of 
Gompaiiy 

First  Years 
Commissions 

General 
Premium 
Chnrg" 

Administration 
Ratio  per  $1000 
Insurance  Pins 

25  MilUon 

60 

.150 

2.53 

60 

50 

.135 

B.4S 

7» 

50 

.lae 

8.84 

100 

60 

.  120 

2.26 

200 

60 

.103 

2.06 

300  " 

50 

.090 

1.91 

400  «• 

50 

.080 

1.88 

600 

60 

.072 

1  75 

600 

60 

.066 

1.70 

700  " 

60 

.063 

1.65 

800  ** 

50 

.088 

1.60 

900 

60 

.061 

1.65 

One  BUlion 

50 

.060 

1.50 

By  the  use  of  the  above  tahle  and  by  the  method  oi  dividaid 
calcnlatioiis  we  can  eamij  ealenlate  how  much  an  iuaeam  in  the  siie  ^ 
the  Company  will  or  oiif^t  in  the  fature  to  diminic^  exp&mut  latios  and 
increase  the  fatme  dividends  of  the  diffmit  WHeyhM&m  in  tiie  Com- 
pai^. 

We  can  thus  easily  calculate  how  much  each  PolicyhcMer  can  affoid 
to  pay  for  new  bnsiness. 

It  is  s^-evident  that  the  Policy h<^dm  camiot  afftn^  to  pay 
much,  for  th^  will  not  be  in  the  Gompany  long  raongh  for  the  dimlniafaed 
expense  ratios  materially  to  affect  thdr  dividesds.  'Hie  ymng  PoU47* 
holdm  can  afford  to  pay  more,  hot  not  more  than  tlieir  foture  diridoida 
will  be  thereby  increased. 

Simila^,  correct  Aceonntii^  must  take  notice  of  the  diliefiraee  in 
the  aggregate  mortality  rate  of  the  young  and  did  Gcnnpanies  and  the 
difference  in  sorr^dear  values  and  lapses. 

lot 


None  of  these  things  appear  in  Net  Legal  Reserve  Valuations.  We 
should  construe  the  Legal  Reserve  Net  Valuation  laws  as  conditions  to 
which  Accounting  should  conform  and  not  as  substitutes  for  Accounting. 

There  is  only  one  way  to  value  all  these  elements  and  that  is  to  in- 
troduce them  into  the  dividend  calculations  and  actually  to  calculate  divi- 
dends by  the  l^al  method  for  all  future  years  and  see  what  dividends  the 
CompoB^  will  actually  earn  iuihe  future  subject  to  all  these  conditions. 


Suppose  tbtfe  wm  so  Legal  Beaeare  Net  Valuation  laws.  How 
would  we  fgamlae  a  Company  and  determine  its  solvency  and  probable 
ftitnre  diTidoids? 

Tbe  Ckmipa^y's  comfracts  are  fotnn^  contingent  and  executory.  Tbe 
bfonness  depeads  upon  armges  and  thoK  ayen^es  are  liable  to  fluctua- 
tion.   

lHri||Mfl|^  the  Cknnpany  may  be  eertaiidy  able  to  cany  out  its  con- 
tracts 4|^^^PMfore,  proride  f<»r  three  things: 

1st  f^Hmpany  must  maintain  a  fund  which  improved  at  the  in- 
terest rate  aciua]]|y  ^ntka^  leallaed  by  the  Omipany  will  along  with  future 
pore  (net)  praninms  pi^  off  all  daims  as  th^  mature,  according  to  the 
daath  rate  actually  \iissst%  realised  by  the  Company.  fWs  is  the  Natural 
Fudky  Beserve  iridch  flie  Company  should  maintain. 

2d.  The  Company  must  maintain  a  Contingency  Beserve  snfflcieiit 
^o  meet  unlooked  for  future  contingencies. 

3d.  Outside  the  Policy  Beserve  and  the  Contingency  Beserve  the  Com- 
pany most  provide  for  ezpmses  to  keq>  Itsdf  going  while  it  is  executing 
the  contracts. 

If  there  are  Legal  Beserve  Net  Valuation  laws  the  Company  should 
In  calculating  its  Beswes  substitute  the  mortalHy  and  interest  rates  des* 
ignated  by  law  in  place  of  its  own  and  thus  maintain  the  Legal  Policy 
Beserve  in  place  of  the  Natural  Policy  Beserve.  This  is  the  only  eflfeet  the 
Legal  Beserve  Net  Valuation  laws  ought  to  have  on  Accounting. 

Correct  Accounting  demands  that  these  three  things  should  be  kept 
distinct  and  should  not  usurp  each  others'  functions,  but  this  rule  is  vio- 
lated in  the  methods  of  Accounting  generally  adopted. 


104 


Deferred  dividends  have  been  wrongfully  allowed  to  usurp  the  func- 
tions of  the  Contingency  Reserve.   This  is  bad  Accounting. 

Deferred  dividends  should  be  looked  upon  as  dividends  that  have  been 
paid  to  the  Policyholders  and  by  the  Policyholders  returned  to  the  Com- 
pany and  deposited  with  the  Company  as  special  funds.  Deferred  divi- 
dends are  thus  in  marked  contrast  to  and  have  no  connection  whatever 
with  the  Contingency  Reserve. 

In  another  way  dividends  are  wrongfully  confused  with  the  Contin- 
gency Reserve.  If  dividends  are  large  the  Company  is  tempted  to  allow 
the  Contingency  Reserve  to  become  too  small,  expecting  to  replenish  the 
(jontingency  Reserve  out  of  future  dividends  because  it  is  so  easy  to  do  it. 
This  is  bad  Accounting,  for  it  throws  on  future  Policyholders  the  charges 
that  ought  to  fall  on  present  Policyholders,  and  destroys  the  l^al  pro- 
I»ortion  between  dividends. 

Again,  deferred  dividends  have  been  wrongfully  used  to  pay  first 
year's  expenses  and  to  put  up  the  Reserves  of  the  young  Policyholders. 
This  is  illegitimate  and  bad  Accounting. 

In  Non-Participating  insurance  savings  from  interest  and  mortality 
usurp  the  function  of  the  expense  loading. 

On  the  other  hand,  in  Industrial  insurance  the  defective  Policy  Re- 
serve is  often  supplemented  by  excessive  loadings. 

All  the  above  ways  of  confusing  the  functions  of  the  Policy  Reserve, 
Contingency  Reserve  and  loading  either  destroy  the  correct  proportions 
between  dividends  or  produce  inequities  in  Non-Participating  premium 
rates. 

Correct  Accounting  requires  that  the  Policy  Reserve,  the  Contingency 
Reserve  and  the  Loading  be  kept  perfectly  distinct.  No  matter  how  large 
the  dividends,  the  Contingency  Beserve  should  be  maintained  intact  to  its 
full  standard,  for  all  the  savings,  no  matter  how  great,  should  be  at  once 
paid  or  credited  as  dividends  to  the  particular  individuals  or  classes  and 
not  wro^^fuUy  ccMiverted  into  a  Contingency  Bes«ve. 

ofmsawb  sTATsmr  for  PosFomi  of  valvatiov. 

We  give  here  the  general  Omdaised  fi»m  of  Statement  for  purposes 
of  Bifidend  calculations  and  Valuations. 


105 


Tlw  Accountant  should  calculate  and  dyetenoine  the  f oUowing : 
1st.  The  assets. 

2d.    The  mean  fluctuation  rate  m  market  value  of  the  assets. 

3d.    Mean  rate  of  interest. 

4th.  MesB  fluctuation  rate  in  interest  rate. 

5th.  Actual  nottaUty  at  diffar^t  ages,  pcAi^  years  mad  dasses  of 
fiolicies. 

6th.  Policy  Reserves. 

7th.  Liabilities  certain  and  eontiiigeiit. 

8th.  The  Contingency  Reserve. 

9th.  The  Divisilde  surplus. 
l#th.  CkMPBiisMOB  rates  cm  first  prpmiuina 
11th.  General  premium  exp&ue  charge. 
12th.  The  Oeoeral  Administration  ratio. 
Idth.  The  per  cent  ssvhigs  in  intdrest. 

14th.  The  per  coit  of  actual  to  expected  oMxrtaUty  at  d^Eer^  ages, 
poIk7  yean  and  kinds  <tf  poUeiea. 

15th.  The  surraider  r?tio  and  per  cent  oi  reserve  saved  on  surrender. 

In  CT^TOiwiiig  the  Company  and  valuing  the  policies  the  dividends 
iiciald  actua]]l(y  be  calculated  hj  the  method  from  the  forcing 
ststement  on  all  forms  pcdicies,  at  all  ages  ot  issue  and  for  all  policy 
yearn.  In  these  calcQlatioss  should  be  included  all  present  as  well  as 
future  and  contingeiit  lii^lities,  including  J^ssm^b  cmnlMioB^  Special 
and  Board  cmitraetSy  premotleii  oldigatimiiSy  etc. 

Wot  dividend  purposes  equities  will  not  be  disturbed  hy  the  substi- 
tutioB  of  the  legal  intmst  rate  and  the  legul  mortality  table  for  the  Com- 
paaf actual  intmrt  rate  and  actual  mortality  table.  In  the  loi^  nm 
the  aggregate  dividends  to  any  one  PfOicyholder  iHSl  be  about  the  same, 
though  by  one  metM  dividesAs  may  start  anall  and  grow  large  and  by 
the  other  method  may  start  large  and  grow  smalL  In  the  kag  ran  the 
reaolt  to  any  one  P<^cy]udder  wiU  be  abont  the  same. 

Thus,  the  L^;al  Reserve  laws  are  not  only  unobjectionable,  but  are 
very  desirable  provided  th^  are  considered  as  eonditi<ms  to  which 'Ac- 
counting must  conform  and  not  ndistitttttti  for  all  Accounting. 


106 


SOLVENCY  AND  INSOLVENCY. 

We  may  for  our  purposes  distinguish  three  sorts  of  insolvency. 

1st.  Natural  insolvency  (by  the  spirit  of  the  contract). 

2d.  Technical  insolvency  (by  the  letter  of  the  contract). 

3d.  Artificial  Insolvency  (outside  the  contract). 

1st  Natural  insolvency  by  the  spirit  of  the  contract. 

As  preliminary  to  this  subject  let  us  consider  the  present  system  of 
Quaranteed  Surrendar  Values.  Under  the  stress  of  competition  the  Com- 
panies now  grant  guaranteed  cash  surrender  values,  loans,  paid-up  and 
extended  insurances' practically  equal  to  the  entire  reserve  on  the  policy. 

In  our  <^ini<Hi  this  is  opposed  to  the  fundamental  principles  of  Life 
Insurance. 

A  Guaranteed  Cash  Surrender  Value  is  in  effect  a  deposit  in  bank 
subject  to  sif^t  draft  In  our  opini<m  a  charter  to  do  a  Life  Insurance 
business  does  not  cover  banking  business  of  this  sort.  We  do  not  believe 
a  life  Insurance  Company  has  the  power  legally  to  bind  itself  by  such 
a  contract. 

Similarly  a  Guaranteed  loan  value  att^pts  to  ^e  away  from  the 
Ckunpany  that  right  of  disoreticm  whidi  it  cannot  legalty  part  with  as  to 
how  and  whai  it  will  make  its  loans. 

Similarly,  Guaranteed  Extended  Term  insurance  in  the  evait  of  lapse 
or  surraider  is,  to  say  the  least,  unwise,  inasmuch  as  it  binds  the  Com- 
pany without  medical  examination  in  the  future  to  grant  a  new  kind  of 
insurance.  It  is  not  an  ^'Aj^rtionment"  m  the  proper  sense  of  tlie 
original  insurance,  but  is  diff^r^t  in  kind. 

On  the  contrary,  paid-up  insurance  of  the  same  kind  as  the  original 
is  the  only  correct  legal  ''Apportionment"  of  the  original  contract,  bdng 
the  same  in  kind  but  proportionally  less  in  amount,  and  is  all  tlK  Gom- 
pany  ought  to  guarantee,  and  is  probably  all  that  the  Company  can  legally 
bind  itsdf  in  advance  to  guarantee. 

Guaranteed  C^Euidi  Surnaider  values  and  Guaranteed  Carii  Loans  and 
Guaranteed  Exited  IiKsurances  are  so  fdreign  to  Life  Insurance  that 
they  cannot  be  '^Valued'*  or  treated  on  Life  Insurance  principles.  We 
wHl,  therefore,  disregard  th^  and  consider  that  th^  are  ''ultra  vires'* 
and  not  in  the  contract. 

The  substance,  tlie  spirit  of  tlie  contracts  between  the  Cmnpany  and 
tile  Policyholders  is  that  the  Company  will  pay  losses  as  they  mature.  If 


107 


the  Company  can  do  tlik  tlie  Company  is  solTent  in  the  spirit  of  the 
contract. 

The  way  to  find  ont  whether  a  Company  if  let  alone  can  meet  all  its 
obligations  as  tlugr  mature  is  as  follows: 

From  the  Condensed  Statement  calculate  diyidends  by  the  legal 
method.  If  these  dividends  are  poeitire  the  Ccnnpany  is  actually  solvent 
and  can  in  spirit  cany  ont  its  contract.  If  the  dividends  are  n^;ative  tiie 
Company  is  insolvent  This  is  Natural  or  Actual  Valuation. 

If  the  policies  are  partieipatinif  d^cient  i«emiums  on  one  policy, 
shown  hy  negative  dividendsy  cannot  be  mippl»nented  the  pontive  divi- 
dends of  other  policies. 

If  some  of  the  dividaids  are  positive  and  some  negative  thto  will 
show  that  premiums  have  been  unsci^tiilcally  loaded. 

In  calculating  future  dividoids  all  future  contingent  liabilities  must 
be  taken  into  account. 

If  imd&F  a  General  Agait's  contract,  renewal  commissions  are  pay- 
able in  future  years,  these  nmst  be  added  to  the  future  genml  premimn 
charge. 

If  under  Special  or  Board  contracts,  liens  exist  on  future  business 
these  must  be  added  to  the  future  exposes  of  General  Administration. 

If  under  Certificates  in  the  nature  of  Stock,  or  under  contracts  with 
Financing  Companies,  any  future  contingent  liabilities  exist  th^  must  be 
added  to  the  correct  class  in  the  future  expense  account. 

If  after  all  these  contingent  future  liabilities  are  taken  into  account, 
dividends  legally  calculated  turn  out  to  be  positive,  the  Company  is  sol- 
vent in  fact  and  in  the  spirit  of  the  contract  Otherwise  the  Company  is 
insolvait 

2d.  Technical  Insolvency  by  the  lett^. 

A  Company  is  solvent  in  the  letter  of  the  contract  wh^  it  can  cany 
out  not  only  the  material  parts  of  the  contract,  but  also  all  the  specific 
details  agreed  upon,  whether  mat^al  or  immaterial  to  the  main  result 

The  most  uncertain  thing  in  Life  Insurance  is  the  interest  rate.  A 
Life  Insurance  contract  may  last  for  seventy  years.  No  Company  dare 
predict  what  the  interest  rate  will  be  seventy  years  from  now. 

Common  prudence  demands,  therefore,  that  an  interest  rate  be  as- 
sumed much  lower  than  expected. 

Mortality  is  more  steady.  Mortality  seventy  years  from  now  will 
probably  be  less  than  now. 

m 


It  a  Company  advertises  a  low  interest  basis  there  is  an  implied  con- 
tract that  it  will  maintain  a  Polity  Reserve,  on  .that  low  basis.  This 
may  require  a  larger  Policy  Reserve  than  needed. 

The  Company  is  technically  insolvent  if  it  cannot  maintain  this  high 
Reserve.  Thou|^  tedinieaHy  inscdvent  the  Company  may  be  amply  solvent 
in  fact 

Technical  Valuation  &i  tiius  no  sufficient  test  of  a  Company. 

3d.  Artificial  In8(dv»U7  ont^e  the  contrad;. 

Each  state  arbitrarily  fixes  an  interest  rate  and  mortality  table  and 
requires  each  Company  to  maintain  Besmes  by  these  rates  (Net  Valua* 
tjcms). 

Net  Valuations  are  artificial  in  establishing  interest  and  nunrtalily 
rates  different  frmn  the  facts  and  defective  in  mnitting  future  loadings 
and  the  many  future  obligations  expected  to  be  paid  out  at  future 
loadings. 

Solv^acy  or  Insolvency  by  the  artificial  d^ective  method  of  the  I«gal 
Reserve  Net  Valuation  plan  is  no  true  test  of  a  Company. 

EQUALIZATION. 

The  Le^al  method  of  Dividend  calculations  not  only  tests  the  solvency 
of  the  Company,  but  tests  the  equities  as  between  the  differrat  Policy- 
holders. 

To  test  whether  premiums  are  equitable  as  between  the  difli»ent 

Policyholders,  we  need  to  calculate  Dividends  by  the  legal  method.  If 
these  Dividends  read  smoothly  the  Premiums  are  equitably  adjusted. 

This  is  more  important  in  Non-Participating  than  in  Participating 
insurance.  For  in  Non-Participating  there  are  no  Dividends  to  adjust 
the  original  inequities. 

In  calculating  Non-Participating  premiums  approximately  the  ac- 
tual interest  and  mortality  rate  should  be  adopted.  These  will  give  the 
Pure  premiums.  The  loadings  should  then  be  determined  by  the  inverse 
method  of  Legal  Dividend  calculations. 

Suppose  the  Company's  experience  is  nearly  the  American  Expe- 
rience Mortality  Table  and  4  per  cent  interest  with  30  per  cent  commis- 
sion on  first  premiums,  5  per  cent  General  Premium  charge  and  fl.50 


109 


geuefal  administration  ratio.  Tlie  Non-Participating  rates  of  the  Com- 
pany should  be  about  as  follows : 

NON-PARTICIPATING— ORDINARY  LIFE. 


Ages 

80 

40 

60 

Pure  Premium  49^                .    .  - 

.30  Commissions  First  Premium 

reduced  to  an  Annuity  

.  05  General  Premium  Charge . . . 

1 .60  Admiiiistrttdoti  Ratio  

18.67 

.19 
68 
1.87 

88.86 

.41 
1.11 
8.06 

66.46 

1.57 
S.77 
8.40 

Non-Fartiolpatiug  Prmntams..... 

16.86 

86.98 

68.19 

Dividends,  if  legally  calculated,  will  depend  upon  the  assumptions 
we  make  as  a  basis  of  Premium  calculations. 

If  ^\e  assume  high  expenses,  true  interest  and  true  mortality  the 
profit  will  be  in  the  expenses. 

If  we  assume  true  expense,  low  interest  and  true  mortality  the  profit 
will  be  in  interest. 

If  we  assume  true  expenses,  true  interest  and  high  mortality  the 
profit  will  be  in  mortality. 

Eiach  of  the  foregoing  assumptions  as  a  basis  will  give  proportionally 
a  different  schedule  of  premiums  and  proportionally  a  different  schedule 
cf  Dividends. 

The  assumpti<ms  made  as  a  basis  of  premiiiiu  calculations  thus  con- 
trol the  relative  proportions  of  future  Dividends.  A  basis  once  assumed 
should  be  maintained  as  long  as  the  policy  is  in  force.  Otherwise  Divi- 
dends will  be  inequitable. 

As  Dividends  by  the  Legal  method  adjust  errors  and  inequities  in  the 
original  assumptions  it  does  not  make  much  difference  what  the  Partici- 
pating premiums  are,  provided  we  calculate  Dividends  on  the  same  policy 
by  the  Legal  method  on  the  same  expected  interest  and  mortality  through- 
out from  year  to  year.  But  this  is  not  tme  of  Non-Participating  insu- 
rance. For  the  latter  the  assumptions  of  expense,  interest  and  mortality 
rates  for  premium  calculation  should  be  substantially  true  at  the  begin- 
ning and  should  remain  true  throughout  from  year  to  year.  Otherwise 
premiums  will  become  inequitable^  evm  if  they  started  on  an  equitable 
basis. 

If  a  Stock  Company  writes  partly  or  wholly  a  Participating  business, 
Dividends  should  be  calculated  (m  each  policy      the  Legal  method  ex- 

110 


actly  as  in  a  Mutual  Comi)any.  Expenses  and  profits  should  be  assigned 
to  individual  Policyholders,  whether  Particii>ating  or  Non-Participating, 
by  the  Legal  method  of  Dividend  calculations. 

P»ut  in  a  stock  Comi)any  the  interest  on  Stock  should  go  to  the 
Stockholders,  for  the  Stock  was  not  ctmtributed  by  Policyholders. 

Also,  the  Dividends  on  Non-Participating  insurance  should  go  to  the 
Stockholders. 

The  above  adjustments  put  the  Policyholders  in  a  Stock  Company 
exactly  where  they  would  be  in  a  Mutual  (^ompany. 

The  above  assumes  that  the  Stockholder's  part  and  tlie  Policyholder's 
part  of  the  Contingency  Reserve  pay  losses  proportionally,  but  this  nmy 
not  be  the  practice  of  the  Company  or  the  agreement  with  the  Policy- 
holders. 

The  agreement  may  be  that  the  Stock  must  be  consumed  before  the 
Policyholder's  part  of  the  Contingency  Reserve  is  resorted  to.  If  so,  the 
risk  to  which  tlie  Stock  is  exposed  is  the  probability  of  its  being  consumed 
by  fluctuations.  This  risk  is  calculated  exactly  like  the  Contingency  Re- 
serve itself  and  for  this  risk  the  stockholder  should  be  paid  what  the  risk 
is  worth. 

On  the  other  hand,  the  agreement  may  be  that  the  Policyholder's  por- 
tion of  the  Contingency  Reserve  must  be  exhausted  b^ore  the  Stock  is 
resorted  to.  If  so,  the  risk  on  the  Stockholders  is  very  much  less.  The 
risk  is  the  probability  of  the  Stock  being  consumed  after  the  balance  of 
the  Contingency  Reserve  is  consumed,  and  for  this*  small  risk  the  Stock- 
holder should  be  paid  what  it  is  worth. 

Thus,  there  are  three  cases.  1st.  Where  the  Stock  and  the  other  part 
of  the  Contingency  Reserve  share  losses  proportionally.  •  2d.  Whm  the 
loss  falls  first  on  the  Stock.  3d.  Where  the  loss  fidls  last  on  the  Stock. 
These  three  cases  are  very  different. 

The  foregoing  is  the  theoretical,  as  weU  as  the  practical,  adjustment 
of  the  lelation  of  the  Stock  to  Participating  and  Non-Participating  in- 
sorance. 

The  above  adjustment  fully  answers  Oie  questions  whether  a  Stock 
Company  should  write  Participating  business,  or  Participatmg  and  Non- 
Participating  at  the  same  time. 

Science  confirms  the  dictates  of  conunon  sense  that  theie  is  no  reason 
whatever  why  these  should  not  be  united,  provided  the  Legal  rights  of 


til 


«ic]i  are  protected.  Tlie  Compai^y  the  Nan-Participating  Policsrholders 
and  the  Participating  Policyholdm  are  all  benefited  the  combination 
and  none  of  th«n  hnrt  in  any  way,  bat  each  strengthens  the  other,  pro- 
Tided  always  that  the  L^;al  method  of  Diridend  calculations  and  of  ad- 
justments are  strictly  followed. 

May  a  Mntnal  Life  Insnrance  Ck>mpany  write  both  Participating  and 
Non-Participating  business? 

This  is  purely  a  legal  question  and  depends  upon  the  ctmstruction 
jNit  upon  the  charter. 

The  charter  will  be  construed  under  the  general  corporation  laws  of 
the  state  in  which  the  charts  was  issued.  These  general  corporation 
laws  differ  in  the  dHE^eiit  states. 

The  charter  will,  of  course,  also  be  construed  by  its  own  wording. 

Thus,  it  is  probably  impossibile  to  lay  down  aiiy  general  law  whether 
or  not  a  Mutual  Company  may  legally  issue  Non-Participating  businesiL 
Each  case  will  stand  on  its  own  footing. 

Should  a  Mutual  Company  write  both  Participating  and  Non-Partic- 
ipating.business,  if  authorised  1^  its  charter? 

This  question  is  already  sullleientiy  answered  above.  If  the  legal 
methods  of  adjusting  rights,  calculating  premiums  and  calculating  divi- 
dends are  adopted,  every  conmdoration  is  in  favor  of  the  Mutual  Company 
writing  both  Participating  and  Non-Participating  business.  Each  class 
strengthens  the  oth»  and  diminishes  expouies. 

SAVINGS. 

The  Legal  method  of  dividend  calculations  not  only  determines 
whether  a  Company  is  solvent  or  insolvent  in  the  widest  sense,  and  not 
only  adjusts  the  equities  as  between  the  various  parties  interested  in  the 
business,  but  also  determines  the  amount  of  savings  apportionable  to 
each  party. 

If  the  Policyholder  is  satisfied  that  the  Company  is  solvent  and 
treating  all  Policyholders  fairlj',  the  final  test  of  the  Company  for  his 
purposes  is  the  net  cost  to  him  of  a  given  policy  in  the  Company.  This  is 
the  final  step  in  the  Valuation  of  the  Company  from  the  Policyholder's 
side. 

This  final  step  consists  in  ascertaining  the  present  value  (taking 
everything  into  account)  of  all  future  legal  dividends  as  determined  by 
the  Company's  present  condensed  ratios. 

112 


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COLUMBIA  UNIVERSITY  LIBRARIES 

This  book  is  duo  on  the  date  indicated  below,  or  at  the 
caipinitiaB  of  a  drtnite  pwlod  after  tiM  date  of  borrowing,  as 
provided  by  the  Kbraij 


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